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How to Get Comfortable With Small Caps

This article was originally published on ETFTrends.com.

With small-cap stocks and the related exchange traded rapidly reasserting themselves as leadership groups this year, some investors may be wondering if the small-cap rally is a case of too far too fast.

Apprehensive investors can wade into smaller companies in less volatile fashion via dividend strategies, such as the ProShares Russell 2000 Dividend Growers ETF (CBOE: SMDV) .

SMDV, a dividend spin on the Russell 2000, the benchmark U.S. small-cap index, tracks the Russell 2000 Dividend Growth Index, which includes small-cap firms with dividend increase streaks of at least a decade. SMDV is up nearly 9% this year and resides less than 2% below its 52-week high.

“Small-cap stocks were among the biggest losers during the stock market’s rout late last year as investors worried about high leverage, but they have outperformed in 2019’s rebounding market, with shares of debt-laden companies leading the charge,” according to Reuters.

Analysts expect firms in the benchmark Russell 2000 index to generate double-digit profit gains throughout 2019. Profits across the Russell 2000 is expected to grow by almost 16% over the first quarter year-over-year after the 12.6% earnings growth rate expected in the final three months of 2018. Some even project the the small-cap benchmark to see profits surge to over 30% year-over-year in the fourth quarter of 2019.


Dividend growth rather than high yield can be a potent, less risky long-term income strategy. Company stocks that issue high dividend yields can be masking their distressed books or may not be sustainable and are heading for dividend cuts. Consequently, these quality dividend ETFs try to limit the impact of these value traps by requiring a history of sustainable dividend growth.

Additionally, the economy is still chugging along, albeit at a slower pace than before. Solid consumer confidence could also bolster the small-cap outlook, notably those that focus on the domestic economy, whereas big multinationals with a larger international footprint will have to suffer through a slowdown in Europe and Asia, along with the strengthening U.S. dollar that hurts foreign sales.

SMDV holds 61 stocks, 42% of which hail from the utilities and industrial sectors. The fund's index yields 2.85%, or more than double the dividend yield on the Russell 2000 Index.

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