The rotation to value stocks and sectors from momentum equivalents has the predictable impact of weighing on small-caps. Over the past month, the iShares Russell 2000 ETF (IWM) is down almost 5.1%.
Investors looking to maintain small-cap exposure should consider doing so with the volatility-damping benefit of dividends, a strategy offered by the $1 billion WisdomTree SmallCap Dividend Fund (DES) . DES has been noticeably less worse than the Russell 2000 over the past month, losing 2.6%. [Small-Cap ETFs Still Have a Place in Long-Term Portfolios]
The nearly 680 companies in DES are pulled from the WisdomTree Dividend Index after the 300 largest market value firms are removed. The WisdomTree Dividend Index is the underlying index for the WisdomTree Total Dividend Fund (DTD) .
The WisdomTree SmallCap Dividend Index has a dividend yield of almost 3.3% compared to a trailing 12-month yield of just 1.25% on IWM.
At a time when small-cap valuations are considered frothy, noteworthy is the 24.7 P/E ratio on DES, which while still above the S&P 500, is well below the P/E of almost 30 for IWM.
DES acts as a potential volatility fighter on multiple fronts. First, the ETF’s underlying index has an almost 31% weight to mid-caps. Second, DES has a 13.3% weight to the utilities sector, the epitome of low beta and this year’s top-performing sector. [Utilities Helping More Than Just Sector ETFs]
DES offers another advantage: Some protection against rising interest rates in the form of a combined 38.2% weight to the industrial, consumer discretionary and technology sectors, the three best-performing sectors in rising rate environments. Not to mention, consumer discretionary and tech have been two of the largest contributors to U.S. dividend growth in recent years. [Getting Big Dividend Growers With ETFs]
Speaking interest rates, nearly two-thirds of the WisdomTree Small-Cap Index yields more than 10-year U.S. Treasuries. That is more than double the weight of the S&P 500 that yields more than 10-years, according to WisdomTree data.
DES also serves as proof that dividends do work with small-caps as the ETF has outpaced the Russell 2000 by a wide margin over the past three years while being 360 basis points less volatile. DES charges 0.38% per year and pays a monthly dividend.
WisdomTree SmallCap Dividend Fund
Tom Lydon’s clients own shares of IWM.
- Investment & Company Information