Playing it Safe Enough With Small Caps | ETF Trends

Small-cap stocks and ETFs are coming off impressive performances in September, but with October’s reputation for equity market volatility, some investors may shy away from the asset class. With the help of the ProShares Russell 2000 Dividend Growers ETF (CBOE: SMDV), investors can remain engaged with small caps, reduce volatility and gain access to a steady income.

SMDV, a dividend spin on the Russell 2000, the benchmark U.S. small-cap index, tracks the Russell 2000 Dividend Growth Index, which includes small-cap firms with dividend increase streaks of at least a decade. The ProShares ETF is one of the highest-rated funds in the small-cap value category.

“Small cap value has under-performed the S&P 500 Index. That is no surprise since most investment styles have. But small cap value has even trailed short-term U.S. Treasury Bonds by a noticeable margin,” according to Forbes.

SMDV can ameliorate some of the performance issues associated with small-cap value due in part to the fact that in terms of investment styles, dividends have a long history of out-performance over value stocks.

Additionally, SMDV yields 2.06%, which is well above what investors find on 10-year Treasuries or traditional small-cap equity indexes.

Sizing Up SMDV

Companies that have consistently increased dividends tend to be high in quality and show a strong potential for growth. These dividend growers have been able to withstand periods of market duress, exhibiting smaller drawdowns as investors sold off riskier assets, while still delivering strong returns on the upside, to generate improved risk-adjusted returns over the long haul.

SMDV has another advantage: a relatively low weight to financial services stocks, a sector that’s usually the largest in many small-cap value strategies. The fund devotes 15.72% of its weight to that sector, but that’s its third-largest sector behind utilities and industrials.

Related: Small-Cap ETFs Could be Volatile in October 

“Financial stocks are the largest sector group within the small cap value world,” according to Forbes. “Falling interest rates in 2019 likely impact these smaller banks and other financial companies, just as they do larger ones. Since the start of the graph above, the 10-year U.S. Treasury Bond yield has dropped from 3.2% to 1.7%.”

Over the past 12 months, SMDV is lower by just 0.35% compared to a loss of 8.59% for the Vanguard Small-Cap Value ETF (NYSEARC: VBR).

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.