A banner year for WisdomTree—largely thanks to their incredible level of success with their hedged Japan fund DXJ—has translated into a number of new product launches as the company seeks to strike gold again with a new fund.
In fact, WisdomTree has now launched as many products this year as they have in the previous two combined, suggesting that they are looking to duplicate their recent success with more innovative ETFs.
The latest addition to this surging issuer’s lineup is back in the domestic market, focusing on small caps. However, the new product looks to offer up fresh exposure to the space, targeting stocks that are growing dividends, marking the first time that this has been tried with U.S. small caps in ETF form (Read 3 Red Hot Dividend ETFs).
Dividend Growth ETF in Focus
The new ETF goes by the name of the U.S. SmallCap Dividend Growth Fund (DGRS) and follows the WisdomTree U.S. SmallCap Dividend Growth Index. This benchmark seeks to follow the bottom 25% of the market capitalization of the WisdomTree Dividend Index after the 300 largest companies have been removed.
From here, the top 50% of companies with the best combined rank of growth and quality factors are selected for inclusion in the benchmark. Growth factors include long term earnings growth expectations, while quality factors include 3 year averages for ROE and ROA. The resulting portfolio consists of about 170 stocks, and it costs investors 38 basis points a year in fees.
In terms of holdings, the ETF is well spread out among individual components, while there is a decent size allocation to mid caps, despite the small cap focus. For sectors, industrials and consumer discretionary combine to take up nearly 50% of the portfolio, followed by double digit allocations (roughly 13% each) to materials and technology (read 3 Important Questions to Ask About Your ETF Portfolio).
“A number of dividend growth indexes focus on backward-looking dividend-screening criteria that we believe exclude many dividend initiators and fast-growers that are often found in the small-cap arena,’ said Jeremy Schwartz, WisdomTree’s Director of Research in a press release. “DGRS is the first, and only, strategy focusing on the U.S. market’s small-cap dividend growth leaders, a segment we believe offers some of the most attractive dividend growth opportunities.”
How Does It Fit in a Portfolio?
This ETF may be appropriate for dividend and growth focused investors who are already heavily exposed to large cap securities, and are looking for a small cap complement. It could also be an interesting addition for those seeking a new way to target domestic stocks, or at least firms that have among the least international exposure (read 3 Bank ETFs Leading the Pack this Earnings Season).
On the other hand, the fund may not be appropriate for investors seeking a broadly diversified play on the small cap segment, as roughly half the portfolio is in high beta sectors. Additionally, due to the focus on growth—for at least half the portfolio—the dividend yield may not be that high for the ETF, so it may not be a true income destination.
Since no other ETF currently on the market has both a dividend and a growth focus on small caps, comparisons are tough for this new ETF. However, there are a few other small cap ETFs to be aware of in the space.
In particular, WisdomTree’s own DES also focuses on small caps, zeroing in on dividend payers. In the growth market, there are a more choices, such as IWO, VBK, and IJT, all of which are billion dollar ETFs that have a growth focus.
Still, these are obviously different than DGRS and its multi-faceted focus so it is hard to compare. However, it is worth noting that DES also has more than $800 million in assets, so clearly there is a ton of interest in small caps be it in dividends or in growth (see 3 Small Cap ETFs with Impressive Yields).
DGRS is an interesting choice, and a novel way to target small caps for growth focused investors. The fund will face some stiff competition though, so it will be interesting to see if investors embrace this model for their portfolios, or if investors will stick to large caps for their growth and income needs.
The technique has already made inroads in other corners of the market though, so one has to imagine that after some time, DGRS will be able to attract a decent level of assets too.
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