It is believed that small-cap value stocks are excellent long-term investments, but over the past three years, the Russell 2000 Value Index has lagged the benchmark Russell 2000 Index and the Russell 2000 Growth Index in significant fashion.
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Small-cap value stocks lagging broader small-cap benchmarks and growth equivalents might imply that small-cap dividend payers have faced headwinds as well. The WisdomTree SmallCap Dividend Fund (ETF) (DES) has something to say about that. Although the Russell 2000 Value Index is up 24.6 percent over the past three years, DES has thrashed those returns by soaring 38 percent, including dividends paid, over the same period.
Dividends And Small Caps
While the number of small-caps paying dividends has increased in recent years, the number of dividend payers residing in this cap spectrum is significantly less than investors are accustomed to finding in the large-cap universe. That is part of the reason DES can be considered a value strategy and an outperforming one at that.
Interestingly, despite its value tilt, DES is outperforming small-cap growth stocks over the past three years, and over the past decade, DES's underlying index has not lagged the Russell 2000 Growth Index by much.
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If were thinking of the period from June 1, 2006, to March 31, 2016, the bulk of that period was characterized by extremely low interest rates that only started on the path to normalization in December of 2015. The income-generating potential of the Real Estate and Utilities exposures over the course of the WisdomTree SmallCap Dividend Indexs history could explain the desirability of the income from these types of stock, said WisdomTree in a recent note.
Allocation To Financials
DES shares one thing in common with traditional large-cap value ETFs, that being a large weight (24.3 percent) to financial services stocks. However, DES's weight to the energy sector, another hallmark of large-cap value funds, is low 4.5 percent. Consumer discretionary and industrial names combine for over 34 percent of the ETF's weight.
DES offers a surprising yield advantage considering it is a small-cap fund. According to WisdomTree data current as of December 31, 2015, DES yielded over 4 percent, while the Russell 2000 checked in with a yield of just under 1.7 percent.
Through March 31, 2016, the Russell 2000 Value Index has delivered outperformance on a cumulative basis against the Russell 2000 Growth Index. There is no way to know if this will continue, but we find it interesting that the WisdomTree SmallCap Dividend Index held up very well in what many would consider a non-favorable environment, characterized by the outperformance of growth over value. If value begins to outperform, it stands to reason that the overall environment could be more favorable to a dividend-focused, small-cap U.S. strategy, added WisdomTree.
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