Domestic small-cap stocks have yet to find their groove in 2025. As of June 6, the Russell 2000 and S&P SmallCap 600 Indexes are both down on a year-to-date basis and with an average loss of 5.1%.
That doesn’t all small-cap stocks have been duds. In fact, investors haven’t needed to take on geographic risk to find small-cap winners. Just look at the WisdomTree Europe SmallCap Dividend Fund (DFE). That ETF is higher by 24% year-to-date. It accomplished that feat with noticeably less annualized volatility than the aforementioned U.S. small stock benchmarks.
DFE celebrates its 19th birthday later this month. It isn’t just trouncing a slew of U.S. small-cap ETFs this year; It’s handily beating the S&P 500 while also offering modest outperformance of some popular large-cap Europe ETFs – a group of funds that are experiencing a 2025 resurgence. The European Central Bank (ECB) announced another rate cut last week. This cut may set the stage could be set for DFE upside in the back half of the year.
DFE Is a Catalyst-Rich ETF
The ECB rate cut further widens the gap with the Federal Reserve. This is pertinent to investors considering funds such as DFE. However, the fund isn’t a dedicated Eurozone play. For example, the U.K., Sweden and Norway, which aren’t Eurozone nations, combine for 54% of the fund’s geographic exposure.
That doesn’t diminish the ETF’s utility because there are compelling valuation stories and catalysts across Europe. For example, Germany, is DFE’s fifth-largest country by weight. The nation is turning the page on austerity to fiscal expenditures, which could boost that economy and its smaller companies.
A recently passed fiscal stimulus package there “includes 500 billion euros for infrastructure to be spent over the next 10 years and an estimated 500 billion euros through the removal of strict budget caps above 1% on military spending and a proposed increase from 2% to 3% of gross domestic product (GDP) in the next few years,” according to Charles Schwab research.
Additionally, earnings per share growth supports the case for owning European equities. The first quarter was the continent’s best earnings season in years. Nearly 60% of the Europe STOXX 600 Index topped analysts’ forecasts. As is the case with domestic small-caps, smaller European stocks have the potential to grow earnings at rates that exceed those of their large-cap brethren.
The weakening dollar, late-arriving investors and European stocks still being under-owned are among the other factors that could be supportive of DFE gains in the second half of 2025.
“If international outperformance continues, the three-year mark for outperformance of the MSCI EMU Index relative to the S&P 500 Index would be reached this October and could prompt even more flows into international stocks. It’s likely not too late to add international stocks to portfolios that remain underweight strategic targets. since these relative performance trends can last for years,” concludes Schwab.
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