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Time to Buy International Small-Cap Dividend ETFs?

Zacks Equity Research

Recent market twirls resulting from shake-ups in the Chinese market have quivered investor confidence across the globe. Added to this, chances of further Fed rate hikes throughout 2016, persistent plunge in oil prices and nagging global growth issues put a spanner into the global market to start 2016.
 
At the tail end of 2015, the Fed hiked key rates after almost a decade. So, chances of volatility are higher if the Fed remains steadfast in tightening its policies this year, putting U.S. equities at some risk. Gradual withdrawal of cheap money will now give scope only to quality stocks. Investors should no longer bet on the broad-based market especially when the scale of negative revisions to Q4 earnings estimates are more pronounced than what we saw in the prior two quarters.
 
On the other hand, plenty of easy money lies abroad with the ECB extending its ongoing QE measure, Japan relentlessly pursuing accommodative policies and even following the QE policy. If this was not enough, several other developed economies and a few emerging countries are also opting for monetary easing. A massive oil price slump in the last nine months, which arrested global inflation, made this possible for the otherwise inflation-ridden emerging nations (read: Oil and Energy ETFs That Hit All-Time Lows).

This makes sense for investors seeking promising investment avenues in international economies. Though it would be unwise to describe foreign economies as smarter bets than America at first glance (as the majority of developed economies are buckling under deflationary worries and poor growth), a spell of monetary easing to jumpstart these ailing economies should make international equities and the related ETFs intriguing bets right now.

And to do so, what could be better than small-cap dividend ETFs?

Small caps are viewed as the backbone of the domestic economy. In a growing economy, these pint-sized securities perform the best as these generate most of their revenues from the domestic market. Naturally, these are less ruffled by global economic concerns.
 
Plus, due to rock-bottom interest rates prevailing in most developed nations, investors must be looking for higher current income. This also bolsters the need for dividend investing in the international arena (read: 3 High Dividend Stocks & ETFs to Buy).
 
Below are our four selections that should perform well in this kind of a global macroeconomic backdrop and could thus be in watch. These serve the dual conditions of small-cap and dividend yields.
 
International Mid-Cap Dividend Fund (DIM)
 
The fund measures the performance of the mid-capitalization segment of the dividend-paying market in the industrialized world outside the U.S & Canada. Financials, Industrials and Consumer Discretionary each get double-digit weight in the fund. Japan is the focus of the fund holding over 21% followed by 18.3% exposure in U.K. The $144.5-million fund lost 0.9% in the last five trading sessions (as of January 14, 2016). The fund yields 2.99% annually.
 
Vanguard FTSE All-World ex-US Small-Cap ETF (VSS)
 
VSS – which tracks the FTSE Global Small Cap ex US Index – invests about $2.27 billion in assets in its 3,443-stock portfolio. Europe consists of over 40% of its portfolio followed by the Pacific taking over one-fourth of the total and emerging markets accounting for about one-fifth. North America makes up over 10% of the basket.

VSS has minimal concentration risk as it invests as low as 3% in its top-10 holdings. It is also a low cost option charging only 19 bps in annual fees. The fund lost about 2.4% in the last five days (as of January 14, 2016). VSS currently has a Zacks ETF Rank #3 (Hold) and yields 2.82% annually.
 
WisdomTree Europe SmallCap Dividend ETF (DFE)

This ETF provides exposure to the small cap segment of the European dividend-paying market by tracking the WisdomTree Europe SmallCap Dividend Index. It is one of the popular funds in the European space with AUM of $938.3 million. The fund charges 58 bps in annual fees from investors.

The fund is heavy on industrials as this segment accounts for more than one-fourth of the portfolio while financials, consumer discretionary and information technology take double-digit exposure each. Among countries, United Kingdom (25.8%), Sweden (13.9%) and Italy (10.1%) dominate the holdings list. The fund was up over 3% in the last one year (as of January 14, 2016). The fund yields 2.93% annually (read: Watch These Europe ETFs If the ECB Prints Money).

WisdomTree International Small-Cap Dividend ETF (DLS)

DLS – which tracks the WisdomTree International SmallCap Dividend Index– invests about $1.02 billion in assets in its 869-stock portfolio. The fund has the greatest exposure in Japan (27.74%) closely trailed by U.K. (16.1%) and Australia (10.7%). DLS too has minimal concentration risk as no stock accounts for more than 0.63% of the basket. It charges 58 bps in annual fees. The fund lost 1.4% in the last one year (as of January 14, 2016) and yields 2.89% annually.

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WISDMTR-IN D MC (DIM): ETF Research Reports
 
VANGD-FA -US SC (VSS): ETF Research Reports
 
WISDMTR-EU SC D (DFE): ETF Research Reports
 
WISDMTR-INT SCF (DLS): ETF Research Reports
 
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