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Small-Cap Dividend ETFs Prove Less Bad


That does not sound like the most encouraging headline, but with all the talk of this year’s laggard status for small-cap stocks and exchange traded funds, less bad can be deemed “sort of attractive.”

With Thursday’s tumble, the iShares Russell 2000 ETF (IWM) is staring at a decline of about 8.5% since its July 1 closing peak, indicating the benchmark small-cap ETF is heading toward another correction. Weakness in small-caps has induced a condition for IWM technical analysts call a “death cross” where the near-term 50-day moving average dips below its long-term 200-day moving average. The new trend indicates a bear market could be right around the corner and the long-term moving average is seen as the new resistance level. [Small-Cap Death Cross]

Getting back to the less bad theme with small-caps, the WisdomTree SmallCap Dividend Fund (DES) is off 7.7% since July 1 when factoring Thursday’s decline, indicating that dividends provide some buffer against small-cap weakness. Year-to-date, DES has outperformed IWM and the iShares Core S&P Small-Cap ETF (IJR) by an average of 50 basis points. [Dividend Buffer for Small-Cap ETFs]

Obviously, there has not been much to write home about this year in the world of broad, U.S.-focused small-cap ETFs, but it is clear there are advantages to mixing dividends with small-caps. At least in the case of DES. The ETF tracks theWisdomTree SmallCap Dividend Index, which sports a dividend yield of 3.49%. That compares with a trailing 12-month yield of just 1.27% on the Russell 2000.

Though not perfect, DES has skirted some of the small-cap slide by virtue of a somewhat conservative sector lineup. While ample exposure to consumer discretionary, technology and health care small-caps works well when there is broader strength among smaller stocks, those sectors have been significant contributors to this year’s small-cap woes. DES allocates a combined 21.5% of its weight to those sectors compared to nearly 43% in IWM. [Advantages of Small-Cap Dividend ETFs]

To be fair, there are examples of small-cap dividend ETFs encountering challenges this year. For example, the WisdomTree U.S. SmallCap Dividend Growth Fund (DGRS) , with a larger combined weight to discretionary, tech and health care names than DES, has trailed IWM on a year-to-date basis.

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 U.S. SmallCap Dividend Growth Index has a yield of 2.43%.

WisdomTree SmallCap Dividend Fund



Tom Lydon’s clients own shares of IWM.