Small-cap stocks are usually more volatile than their large-cap counterparts. That was the case last year when, during the broader market’s fourth-quarter swoon, small caps entered bear markets before large caps.
There are avenues for reducing small-cap volatility and some include compensation in the form steadily rising dividends. The ProShares Russell 2000 Dividend Growers ETF (CBOE: SMDV) is one ETF to consider for not only dividends, but reduced small-cap volatility.
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. SMDV’s ability to weather storms was confirmed in real time in the fourth quarter.
“In the fourth quarter of 2018, when the Russell 2000 Index lost 20.2% the Russell 2000 Dividend Growth Index was down just 8%,” according to FTSE Russell.
Long-Term Performance
SMDV, which has a five-star Morningstar rating, turns four years old in a few weeks, but its underlying index has offered impressive long-term performance relative to traditional small-cap benchmarks.
“According to Harnessing the long-term potential of dividend growth, a new report from FTSE Russell, the Russell 2000 Dividend Growth Index had an annualized return of 11.8% from June 1998 through December 2018, versus 7.6% for the Russell 2000 Index,” said FTSE Russell. “And these returns were achieved amid a respective annualized volatility of 15.1% and 19.6% for the same period. More return for less risk resulted in a significantly higher return/risk ratio of 0.78 for the Russell 2000 Dividend Growth Index.”