A Pleasant Surprise With This Small-Cap ETF
Small-cap stocks and exchange-traded funds are often thought as destinations for investors seeking growth. With that can come added volatility and making that trade-off all the more the difficult is that small caps are usually a low-yielding corner of the equity market.
Add to that, if U.S. small-caps have a reputation for volatility, then many investors often view international small stocks as being even more volatile than the U.S. equivalents. Fortunately, the WisdomTree Intl. SmallCap Div Fd. (ETF) (NYSE: DLS) can change the way investors think about small caps, dividends and volatility.
A New Way Of Thinking
DLS currently sports a distribution yield of 2.53 percent, or 110 basis points more than the trailing 12-month dividend on the widely followed Russell 2000. Plus, DLS defies the notion that international small caps have to be a risky asset class. Actually, data suggest U.S. small caps are more volatile than their international peers.
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“One reason for this is that international companies tend to be predominantly dividend payers compared to the Russell 2000, in which almost 20 percent of companies tend to be unprofitable and nearly half the companies tend to be non-dividend payers,” said WisdomTree Research Director Jeremy Schwartz in a recent note.
The major country exposures in DLS reflect the ETF's less volatile spin. Japan, the U.K. and Australia combine for about 56 percent of the ETF's weight and there is only scant emerging markets exposure among the 23 countries represented in DLS.
In the essence of portfolio diversity, DLS can be paired with a Russell 2000 fund with impressive long-term results and lower volatility.
The Power Of Diversification
“Interestingly, showing the principles of diversification, a 50/50 approach of developed international small caps combined with the Russell 2000 and rebalanced annually back to the 50/50 allocation delivered a risk level that was almost as low as the international small-cap dividend payers and substantially lower than the volatility of U.S. small caps on their own,” added Schwartz.
The $1.1 billion DLS, which recently celebrated its tenth anniversary, has been 420 basis points less volatile than the Russell 2000 since coming to market. Over that time, DLS has also outperformed the MSCI EAFE Index by an almost 3-to-1 margin while being 350 basis points less volatile, indicating that investors would have been more rewarded with small-cap developed markets dividend payers than with large-cap developed markets names.
Industrial, consumer discretionary and financial services stocks combine for almost two-thirds of the sector lineup in DLS.
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