Small-cap stocks are creeping higher, but these names can be volatile. However, there are ways for investors to harness the potency of small caps in conservative fashion and with a dividend kicker, too. Enter the ProShares Russell 2000 Dividend Growers ETF (CBOE: SMDV).

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.

“The small cap Russell 2000, trailing other indices in the march to new highs, broke its previous high from May 6 of 1,618.4 early Monday and then climbed higher into the close. The Russell has risen near that level previously but failed to break above it,” according to CNBC.

The struggles of small caps to take old highs actually underscore the advantages of the less volatile SMDV. Plus, investors don’t have to leave upside on the table as the ProShares fund is up 4.70% since the start of the fourth quarter and resides just 2.32% below its 52-week high.

Improving Economic Sentiment

“Improving economic sentiment has prompted some investors to take a second look at underperformers among both value stocks and small-cap shares. Value shares tend to be concentrated in economically sensitive sectors such as financials and energy,” reports Reuters. Shares of small-cap companies, which tend to be more domestically focused than their large-cap counterparts, often track investors’ outlook on the U.S. economy.”

SMDV allocates nearly 17% of its weight to the financial services sector, a prime value destination.

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.

“Though some market analysts are skeptical that large-cap value shares will sustain their market leadership, the improving earnings backdrop for small-cap companies could nonetheless boost their shares,” according to Reuters. “Earlier this year, the earnings growth rate for small-cap companies lagged that of large-cap companies, in an aberration from usual pattern.”

For more on core investing strategies, please 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.

Subscribe to our free daily newsletters!
Please enter your email address to subscribe to ETF Trends' newsletters featuring latest news and educational events.