Small caps have not been immune from recent equity market carnage as highlighted by a March decline of 15.35% for the Russell 2000 Index, but investors can nibble at smaller stocks with the ProShares Russell 2000 Dividend Growers ETF (SMDV).
SMDV may be the way for investors to reengage with small caps because, in addition to providing a higher level of income than traditional small-cap indexes, it’s usually less volatile and performs less poorly in rough markets. For example, the ProShares ETF has been about 300 basis points less bad than the Russell 2000 this month.
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.
In the current environment, investors should consider quality dividend growth stocks that typically exhibit, stable earnings, solid fundamentals, strong histories of profit and growth, commitment to shareholders and management team conviction in their businesses.
If markets rebound in earnest from recent weakness, 2020 could be the year that investors could go big on small cap equities.
“As a group, SMDV’s holdings generally have had stable earnings, solid fundamentals, and strong histories of profit and growth,” according to ProShares. “SMDV’s strategy has a demonstrated history of weathering market turbulence over time by capturing a significant portion of the gains of rising markets and fewer of the losses in falling markets.”
Over the past decade, SMDV’s underlying index has delivered lower overall volatility, reduced volatility, superior capture ratios and better risk-adjusted returns relative to traditional small-cap benchmarks.
Quality stocks, including those on SMDV’s roster, present an opportunity to diversify a portfolio. Specifically, investors should consider quality dividend growth stocks that typically exhibit, stable earnings, solid fundamentals, strong histories of profit and growth, commitment to shareholders and management team conviction in their businesses.
Another perk of SMDV is that its 14% weight to the financial services sector is underweight that of the Russell 2000 by nearly 300 basis points. Small-cap financials are among the most vulnerable in the sector to lower interest rates. Utilities and industrial stocks combine for about 45% of SMDV’s roster, according to ProShares data.
For more on core investing strategies, visit our Core ETF Channel.
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.