Small Caps, Big Dividends And Returns Here


With U.S. equities continuing to march higher, a broad array of small-cap exchange-traded funds have recently been touching record highs. That is nice, but those new highs do not erase the substantial underperformance of smaller U.S. stocks relative to their international counterparts this year.

For example, the widely followed Russell 2000 Index is up 6.2 percent year to date, meaning the WisdomTree Europe SmallCap Div Fd (ETF) (NYSE:DFE) is outpacing the U.S. small-cap benchmark by a margin of better than 3-to-1.

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Making DFE's 2017 feats of strength all the more impressive is that the ETF the better trade on risk-adjusted basis relative to US-focused rivals. DFE's annualized volatility to this point in the year is 10.5 percent, well below the average about 13.3 percent for the Russell 2000 Index and the S&P SmallCap 600 Index.

Intriguing Value, Too

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In addition to their penchant for volatility, U.S. small caps usually trade at higher earnings multiples than their large-cap counterparts. International small caps do not suffer from that valuation issue.

Actually, small caps in plenty of ex-U.S. markets, including DFE's universe, are attractively valued.

WisdomTree's universe of international small-cap indexes are less expensive than its market cap-weighted benchmark on a P/E basis, with the European index having the greatest discount of 21%. And when you consider the relative value between the U.S. and international indexes, the Russell 2000 Index is more than twice as expensive as the highest P/E WisdomTree Index, said the issuer in a recent note.

The WisdomTree Europe SmallCap Dividend Index, DFE's underlying index, had a P/E ratio of just over 14 at the end of the second quarter compared to 29.2 on the Russell 2000, according to issuer data. DFE's index has a dividend yield of nearly 3.6 percent, or about triple the dividend yield on the Russell 2000.

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With economies throughout Europe on the mend, DFE is positioned to continue taking advantage of that trend.

Small caps generate a greater share of their income domestically than do large caps, and theyre less susceptible to trends in global trade or the reverberations on trade from currencies, said WisdomTree.

DFE allocates 38.8 percent of its combined weight to the U.K. and Sweden. The ETF's largest allocation to a Eurozone nation is 11.1 percent to Italy, the Eurozone's third-largest economy. Overall, 15 countries are represented in DFE.

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