Investors looking to bolster equity income while diversifying into ex-U.S. developed markets stocks in 2018 have some compelling exchange traded funds to consider, but one of the more solid ideas may just be the WisdomTree International SmallCap Dividend Fund (DLS).
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The WisdomTree International SmallCap Dividend Fund is more than 11 years old and is up more than 24 percent year-to-date, meaning it is outperforming the Russell 2000 Index by a 2-to-1 margin. DLS has a trailing 12-month dividend yield of 2.74 percent, or about 150 basis points above the yield on the Russell 2000.
Stocks in DLS are weighted on the basis of annual cash dividends paid, a strategy that helps avoid the pitfalls associated with yield weighting while potentially exposing investors to sturdy sources of future dividend growth.
Focusing On Factors
DLS is clearly a smart beta ETF and a small-cap fund, meaning the size factor can and does drive the fund's performance. The size factor could be advantageous for DLS again in 2018.
Interestingly, the size factor has seen its excess performance spike upward in recent years, according to WisdomTree.
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When we review investors portfolios, we typically see many who already allocate to U.S. small caps. However, it is far less frequent that we find international small caps, from either developed or emerging markets. Given how much value small caps can add to a portfolio, we fully advocate for their inclusion where appropriate. That said, when it comes to small caps, we always prefer a discretionary approach.
While DLS is not explicitly dedicated to the low volatility factor, the ETF also offers a volatility advantage over U.S. small-caps. Year-to-date, volatility for DLS is 430 basis points below the Russell 2000 Index.
Dividends can imply an element of quality, an investment factor DLS obliges. Importantly, the introduction of quality can boost the efficacy of the size factor.
While many small companies can be lower in quality, when those are removed from the equation, the size factor becomes much more robust in efficacy, said WisdomTree.
Japan and the U.K. combine for 42 percent of the DLS lineup. Australia and Sweden combine for 17.8 percent. Overall, 23 countries are represented in the fund.
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