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.”
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The weighted average market value of SMDV’s 61 holdings is $2.24 billion. The fund allocates 20.60% of its weight to utilities stocks. Industrial and financial services stocks combine for almost 29% of SMDV’s weight.
Dividend growth can be a sign of health balance sheets, a prized quality among small-cap stocks.
“Periods of higher market volatility tend to reinforce the value of finding higher quality companies that continually grow their dividends, particularly in the US small cap asset class as they tend to perform better in times of stress,” said ProShares Senior Investment Strategist Kieran Kirwan. “These companies tend to have stronger balance sheets, more consistent earnings, and resilient business models.”
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