ETF investors looking for small-capitalization U.S. market exposure should consider a dividend growth strategy that could potentially generate improved risk-adjusted returns over the long haul.
The ProShares Russell 2000 Dividend Growers ETF (BATS: 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.
“The Russell 2000 Dividend Growth Index includes companies with high dividend growth plus small cap exposure,” Tom Goodwin, senior research director of FTSE Russell, said in a note. “With dividends reinvested, its relative performance compares favorably to its benchmark…. Not only have the returns been higher than the parent Russell 2000 Index since going live, but volatility and drawdowns have been substantially less.”
Since its inception on November 11, 2014, the Russell 2000 Dividend Growth Index has generated an annual 13.4% return with an annual 13.5% volatility, whereas the benchmark Russell 2000 Index showed a lower return of 7.6% with a higher volatility of 16.5%.
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.