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A Small-Cap Opportunity in Europe

This article was originally published on ETFTrends.com.

European equities have been drubbed alongside other developed markets this year and that includes the region's small-cap names. For instance, the WisdomTree Europe SmallCap Dividend Fund (DFE) entered Wednesday with a year-to-date loss of more than 21%.

While Europe-related exchange traded funds are struggling this year, compelling valuations throughout the region and robust dividend profiles could make ETFs like DFE credible options for investors seeking some international portfolio diversification in 2019.

“While some investors may have a dedicated European large-cap exposure in their global portfolios, far fewer most likely have dedicated exposure to European small-caps,” said WisdomTree in a recent note. “This could be a costly mistake. In the European market, there is a significant difference between large- and small-cap companies in terms of where they derive their revenue from, geographically.”

DFE ETF Details

DFE, home to nearly $800 million in assets under management, debuted 12 and a half years ago. The fund holds over 400 stocks and has a dividend yield of just over 3%, well above what is found on traditional domestic small-cap benchmarks.

European small-cap strategies “also provide different exposure across sectors. We believe a blend of large- and small-caps can offer a unique complement, particularly when currency volatility is mitigated with a 50% currency-hedged baseline as discussed in a recent post,” according to WisdomTree.

DFE allocates just over a quarter of its weight to industrial stocks while consumer discretionary and financial services names combine for about a third of the ETF's weight. The consumer staples and real estate sectors combine for almost 16%. DFE can be combined with a large-cap strategy such as the WisdomTree Europe Hedged Equity Fund (HEDJ) to reduce correlations and volatility.

“In addition to the lower volatility benefits of both dividend weighting and currency hedging for the respective funds, HEDJ and DFE had only a modest correlation to each other (0.63), which helped to further reduce the volatility of the hypothetical blend,” according to WisdomTree.

DFE's largest geographic weights are the U.K., Sweden and Italy, which combine for about half the fund's weight.

For more information on European markets, visit our Europe category.

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