Big Potential With A Small-Cap Europe ETF | ETF Trends

European equities and the related exchange traded funds are showing some signs of life this. The WisdomTree Europe SmallCap Dividend Fund (NYSEArca: DFE) is higher by almost 7% and is a credible avenue for income-hungry investors seeking European exposure.

Like other developed markets, many European markets, both in and out of the Eurozone, are home to major equity benchmarks with higher dividend yields than the S&P 500. The yield disparity between European stocks and bonds has been widening as recent global uncertainty pushed investors out of the equities market and into safe-haven fixed-income assets.

While many U.S. investors are inclined to lean toward domestic small caps, there are compelling reasons to consider DFE at the moment.

“The lower risk of U.S. small caps should lead to the Russell 2000 Index having a higher forward P/E multiple—a factor that is not in dispute. The real question is, given the balance of risks, how much higher should the multiple be than, say, that of the WisdomTree Europe SmallCap Dividend Index? What we see in figure 1 is something on the order of 50%,” according to WisdomTree. “The forward P/E ratios of the WisdomTree Europe SmallCap Dividend Index and the MSCI Europe Index have been quite similar, with the WisdomTree Index having the current advantage.”

Evaluating European Dividends

Valuations still look attractive relative to domestic stocks. On a forward earnings basis, European stocks have gotten cheaper continually since 2015, and price-to-book value for the region shows European names trading at a multi-year discount to the U.S.

Historical data suggest investors would do well to consider European small caps over the region’s large-cap names.

“Since 2013, the WisdomTree Europe SmallCap Dividend Index has opened up a dramatic performance gap over the MSCI Europe Index. This illustrates an important point, especially since we recognize that when investors look beyond the U.S., they often look only at large caps,” according to WisdomTree.

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DFE allocates 40.60% of its geographic weight to the U.K. and Sweden. Italy and Germany combine for 18.45%.

“European small caps have delivered strong performance in the long term and currently offer a large discount over U.S. equities. That’s where we see an opportunity,” said WisdomTree.

For more information on European markets, visit our Europe category.

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.