Small-cap stocks and the corresponding exchange traded funds are trouncing their large-cap rivals. Some dividend funds are getting on that act, including the ProShares Russell 2000 Dividend Growers ETF (BATS: SMDV).
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. After surging nearly 10% in the second quarter, SMDV resides near all-time highs. The fund is up 6.25% year-to-date.
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.
Related: CEF-Themed ETF An Attractive Yield Opportunity
Small-Cap Quality
Dividend growth as a means of trumping inflation could and arguably should serve to highlight the advantages of the ETFs that focus on dividend growth stocks. That group is comprised of well-established ETFs that emphasize dividend increase streaks as well as a new breed of funds that look for sectors chock full of stocks that have the potential to be future sources of dividend growth.
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.
Dividend growth, particularly with smaller companies, can be a sign of the quality factor. Valuing high quality value is particularly important as bull markets enter their waning stages, as some market observers believe the current bull market is doing. In the early stages of bull markets, lower quality companies see their shares soar. However, as the bull matures, investors often exhibit a preference for higher quality fare with more compelling valuations.
Over 23% of SMDV’s 59 holdings hail from the utilities sector while the industrial and financial services sectors combine for over 27% of the ETF’s roster.
For more information on dividend-paying stocks, visit our dividend ETFs category.