Market Overview

Get A Paycheck From Europe Small-Cap ETF


Small-cap stocks and the corresponding exchange traded funds are getting smacked this year and ex-U.S. developed markets are no exception to that trend. With European equities struggling, it is not surprising that the same is true of the region's small-caps.


Europe bulls argue that selling there is overdone, that the European Central Bank can boost its quantitative easing efforts to support stocks and that there is compelling value to be had across the pond. Investors adventurous to consider European stocks and ETFs right now would do well to consider the protection offered by dividends.


That protection can be had with the WisdomTree Europe SmallCap Dividend Fund (NYSE: DFE). DFE's 6.8 percent year-to-date loss is not impressive, but it is more than 100 basis points better than the S&P SmallCap 600 Index and far superior to the Russell 2000 Index. Betting on DFE is a more attractive when considering European dividends are growing.


“On the back of this trend, the strength in European equity fundamentals is apparent, with stable balance sheets helping sustain generous dividend growth over the past year. These fundamentals are set to remain stable for the next four quarters too, with 6 out of 10 equity sectors forecasted to grow TTM DPS. Financials and consumer discretionary are expected to remain at the heart of this trend; their durability pointing to a broadening of the European recovery,” said WisdomTree in a recent note.


DFE allocates a combined 35.6 percent of its weight to financial services and consumer discretionary stocks. The ETF's 30-day SEC yield of 3.1 percent is nearly double the comparable dividend on the Russell 2000 Index.


DFE is not a dedicated Eurozone ETF as the fund devotes over 39 percent of its combined weight to U.K. and Swedish stocks, so there is some Brexit risk with the fund. When factoring in DFE's more than 20 percent combined weight to Swedish, Danish and Swiss stocks along with the ETF's heavy Eurozone exposure, DFE is heavily allocated to countries with negative interest rates. 


Importantly, the ability of European companies to maintain solid balance sheets bodes well for DFE's dividend growth and payout sustainability.


“The resilience of European corporate profitability follows years of cost discipline and capacity rationing. This has allowed global diversified industrials such as Siemens to remain resilient against a weakening global macro backdrop, recently raising its full year outlook for earnings per share on the back of consensus-beating profit performance in Q1 2016. Through controlling wages and keeping a tight lid on investments, European corporates are now better positioned to sustain profitability levels even as global economic growth slows,” adds WisdomTree.

Posted-In: Long Ideas Dividends Specialty ETFs Eurozone Markets Trading Ideas ETFs


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