Small-cap stocks and dividends are a combination that often goes overlooked, but some exchange traded funds can show investors the potency of the size factor combined with income. The ProShares Russell 2000 Dividend Growers ETF (Cboe: SMDV) is one of those ETFs.
SMDV is 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.
By focusing on companies that have consistently increased dividends every year for the past decade, the Russell 2000 Dividend Growth Index avoids the so-called yield trap where a stock can have a high dividend yield following a steep decline in price.
“The Russell 2000 Index has a return of nearly 27% since the US presidential election last November, outperforming other major US cap tiers,” Tom Goodwin, senior research director for FTSE Russell, said in a note. “And this is without the benefit of the new administration having passed any significant new legislation.”
A way to interpret the current market conditions among small-cap stocks is by the length and breadth of their performance. Looking at historical data, Goodwin also found that small cap cycles since 1978 showed the current Russell 2000 Index generated an uptrend of a 31% annualized return and 63.5% absolute return in the 464 trading days since February 11, 2016.
Due to its emphasis on steady dividend growers, SMDV’s lineup is small relative to traditional small-cap funds. The ETF holds just 59 stocks, but SMDV has its perks. Those include the potential to outperform standard small-cap benchmarks over the long-term while being less volatile.
“Companies that consistently grow their dividends tend to be high quality with long histories of profit and growth, strong fundamentals and stable earnings, and management teams with conviction,” according to ProShares. “These features have generally enabled dividend growers to withstand repeated market turmoil and still deliver strong returns with lower volatility.”
SMDV allocates nearly a quarter of its weight to the utilities sector while the financial services and industrial sectors combine for over a third of the fund’s weight. SMDV is up more than 2% in the fourth quarter and resides just about 3% below its 52-week high.
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