Newsletter Watch: Small-cap, dividend ETFs
Last week, I began a column on small cap funds, noting that while they are not immune to a market decline, they do offer the added safety of diversification and professional management.
This week we continue our look with a trio funds that add another element of “value” during a volatile market period. All three – from the WisdomTree family of exchange-traded funds – focus on dividend-paying stocks.
Jim Lowell looks abroad and rates WisdomTree International SmallCap Dividend Fund (NYSE: DLS) a “buy.”
The editor of Forbes ETF Advisor says, “Show me the money; or better yet, show me the jobs! Where jobs are being created, consumers are being minted. Where consumers are being minted, money is being spent. Where money is being spent revenue is being generated. Where revenue is being generated earnings can arise.”
This fund, notes Lowell, focuses on the “least well followed and most inefficiently traded” capitalization range in the established foreign markets of Europe and Japan – small caps.
He explains, “And just as U.S. small cap stocks have been the best long-term investment over the past 30 years here, born on the burgeoning middle/consumer class that holds our economy’s fate in its spending hands, the re-emerging middle class in Europe, and the emerging middle class in Asia are doing likewise.”
Says Lowell: “I expect their markets and, in particular the small cap stocks in those markets, to follow suit.” The fund, he notes, is made up of non-US and Canada dividend-paying stocks from the bottom 25% of the market cap of the WisdomTree DEFA Index excluding the top 300 companies.
The top three country allocations, he observes, are Japan (22.2%), United Kingdom (20.5%), and Australia (17.8%). Its top 10 holdings are Electrocomponents PLC, Kungsleden, Orion, CSR Ltd, Brit Insurance, Euronav, ACTA Holding, Smorgon Steel Group, Jardine Lloyd Thompson Group and Auckland Int’l Airport.
Walter Frank, editor of MoneyLetter, also looks and selects WisdomTree Europe SmallCap Dividend (NYSE: DFE). He explains, "The fund measures the performance of the small cap segment of European dividend paying stocks."
After segmenting all European dividend-paying stocks, he notes, the 300 largest companies are removed and this index is comprised of the bottom 25% of the remainder.
The resulting portfolio, Frank observes, is most heavily weighted in the industrial sector (27.7%), followed by financial (23.2%) and consumer cyclical and non-cyclical (16.3% and 16.2%, respectively).
United Kingdom firms have the broadest representation (40.2%) by quite a margin, followed by Sweden, Italy, Germany and Finland, which range from 6.8% to 9.9% of assets. The advisor adds that the fund’s 364 stocks are actually about one-third in mid-caps with the remainder in small caps.
Meanwhile, within Morningstar’s Europe stock category, he notes that the fund’s year-to-date gain of 16.2% puts it ahead of nearly 80% of its peers.
Dr. Marvin Appel and Gerald Appel prefer a fund that focuses on U.S. stocks and are recommending WisdomTree SmallCap Dividend ETF (NYSE: DES).
The co-editors of Systems & Forecasts explain, “Selecting stocks based on dividend yields has had certain advantages. First, compared to bonds, stock dividends receive better tax treatment (at least until the end of 2010) and have the potential to increase over time.”
The advisors continue, “Second, high-yielding stocks as a group have been less volatile than the overall market and have held up better during bear markets.”
Wisdom Tree’s dividend-based ETFs, they note, are based on indexes that weight stocks by the dollar amount of dividends paid. They explain, “One winning fund based on this strategy is the Wisdom Tree Small Cap Dividend ETF.”
They note, “The fairest way to evaluate the fund is to measure it against small cap value mutual funds or indexes. As such, we have compared its performance to the average small cap value mutual fund for each 10-year period since 1968.”
Based on the hypothetical long-term returns and risks of the SmallCap Dividend Index over the past 40 years, they observe, the Small Cap Dividend ETF would have outperformed the average small cap value mutual fund by more than 2% a year with significantly less drawdown risk.
The advisors conclude, “We are sufficiently impressed by the long-term record of DES to recommend it as part of your long-term portfolio holdings.”
