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A Sensational Small-Cap Idea

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A Sensational Small-Cap Idea

Nearly halfway through 2017, it is abundantly clear that U.S. small caps are one of this year's most disappointing asset classes. The Russell 2000 Index and the S&P SmallCap 600 Index have an average year-to-date gain of just over 2 percent, meaning they are, on average, being outpaced by the S&P 500 by a better than 4-to-1 margin.

Small Caps, Sophisticated Investing

Another point regarding small caps: International small caps are crushing their U.S. counterparts, proving all is not bad in the land of smaller stocks. It is merely a matter of investors considering small caps broadening their horizons beyond U.S. borders.

Investors can get the added benefit of dividend income with international small caps with the $1.4 billion WisdomTree International SmallCap Dividend Fund (NYSE: DLS). DLS provides income-seeking investors with a credible alternative to the MSCI EAFE Small Cap Index.

Changing Strategies For Summer

“Now that we’re coming into the summer of 2017, we can see that those courageous and able to look beyond the apparent U.S. luster in the aftermath of President [Donald] Trump’s victory — investing beyond U.S. borders even in the face of the perceived risks — have largely outperformed those who stuck with their home bias,” said WisdomTree in a note out Wednesday.

Investors that shrugged off their domestic bias with DLS to start the year have been rewarded. The ETF is up more than 17 percent, obviously outpacing U.S. small-cap benchmarks as well as the high-flying MSCI EAFE Index. DLS also sports a dividend yield that is more than double that of the competing U.S. small-cap indexes.

The WisdomTree ETF allocates over 42 percent of its weight to Japan, home to some of the world's best-performing small caps this year; and the U.K. Australian small caps account for another 11.2 percent, indicating DLS is overweight Australia relative to the large-cap MSCI EAFE Index.

“While these things are never certain, relative to where we were at the start of 2017, developed international markets are tending to shift from more negative to positive expectations. U.S. expectations were very positive and may be shifting to become more negative,” said WisdomTree. “Tapping into this shift with developed international small caps could bring helpful diversification into one's small-cap allocation.”

Over the past three years, DLS has outperformed the MSCI EAFE Index by an almost 4-to-1 margin while being more than 200 basis points less volatile. Over the same period, DLS has been 300 basis points less volatile than the Russell 2000.

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