Although interest rates continue rising, 2018 has been a banner year in terms of domestic dividend growth with some dividend-focused exchange traded funds delivering steady returns in the face of rate tightening by the Federal Reserve.
With small-cap stocks and ETFs performing well this year, investors may want to consider the potentially potent combination of dividend growth and smaller stocks. The ProShares Russell 2000 Dividend Growers ETF (CBOE: SMDV) helps with objective.
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.
“Dividend payers often underperform in the early part of a rising rate cycle. But as the interest rate cycle matures, dividend payers in general, and dividend growers in particular tend to more than recoup that initial underperformance,” according to ClearBridge Investments.
SMDV ETF Advantages
A stronger U.S. dollar and concerns over weaker global growth are also driving investors toward smaller company stocks that tend to earn most of their money from a still growing domestic economy. Further supporting the small-cap outlook, the U.S. economy is still showing signs of growth with U.S. retail sales and consumer spending trends on the rise while the rest of the world is revealing weaker economic data.
While 21.42% of SMDV’s holdings are utilities stocks, the ETF offers some cyclical positioning via combined 27.51% weight to industrial and financial services stocks. Banks, including small-cap names, are benefiting from changes in U.S. tax policy.
“Banks stand out as one sector that particularly benefits from the tax cuts, as most of them, including many of the largest banks, are primarily U.S.-focused. The change in the tax rate alone has lifted net income for many banks by around 20%,” notes ClearBridge.
Related: ETF Investors Should Look to Small-Cap, Growth as Rates Rise
SMDV also delivers less volatility than traditional small-cap benchmarks. Over the past three years, the ETF’s average annualized volatility has been significantly less than that of the Russell 2000 Index and the S&P SmallCap 600 Index. During that period, SMDV outperformed the Russell 2000.
SMDV’s trailing 12-month dividend yield is more than 70 basis points above that of the Russell 2000. Investors added $15.79 million to SMDV in the third quarter.
For more trends in fixed income, visit the Rising Rates Channel.