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Remembering International Small-Caps While Getting Paid To Do So

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Remembering International Small-Caps While Getting Paid To Do So

Historical data indicate many investors typically allocate significant portions of their portfolios to domestic large-caps, while being underweight international stocks. From there, it can logically be inferred that most investors are grossly underweight international small-caps, if they have any exposure to that asset class at all.

International And Small-Cap Exposure In One

How investors arrive at international small-cap exposure is just as important as having that exposure in the first place. The WisdomTree Intl. SmallCap Div Fd. (ETF) (NYSE: DLS), which celebrates its tenth anniversary next month, is a solid idea for the “how” of investing in ex-US small-caps.

All 22 of the countries represented in DLS are developed markets and the ETF devotes over 54 percent of its combined weight to the UK, Japan and Australia. In other words, investors applying the logic of “U.S. small-caps are volatile, so the international equivalents must be more so” might be surprised to learn DLS is not alarmingly volatile.

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In fact, the ETF's trailing three-year volatility of 13.2 percent is well below that of the Russell 2000 Index and the S&P SmallCap 600 Index, the most widely followed U.S. small-cap benchmarks. Additionally, DLS has been significantly less volatile than the large cap-heavy MSCI EAFE Index over that period. Other data points further bolster the case for allocating to DLS.

Adding DLS To Your Portfolio

“Currently almost 18 percent of the Russell 2000 is in unprofitable companies, and 45 percent in non-dividend-paying companies. This makes the dividend characteristics of the Index a nonfocus, with average dividend yields close to 1.6 percent and companies typically being net share issuers (not conducting net buybacks) to fund their growth,” said WisdomTree Research Director Jeremy Schwartz in a note out Monday.

DLS follows the WisdomTree International SmallCap Dividend Index, a fundamentally-weighted that eschews many of the prosaic methodologies of common dividend ETFs in favor of weighting member firms on the basis of cash dividends paid.

While many large-cap international dividend ETFs focus on yield, increasing those funds' exposure to the energy, telecom and utilities sectors, those groups combine for seven percent of DLS's lineup. Rather, DLS is more exposed to improving local economies and export trends by way of a combined 44.5 percent weight to industrial and consumer discretionary names.

“I believe now is a great time to consider these foreign allocations. The U.S. markets look expensive compared to foreign markets, and valuations on these small-cap Indexes appear reasonable. I would suggest investors approach this category for long-term allocations by choosing to either passively or dynamically hedge the currency,” added Schwartz.

DLS has a currency hedged brother, the WisdomTree International Hedged SmallCap Dividend Fund (NYSE: HLDS), which debuted nearly a year ago.

 

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Posted-In: international ETFs international small-cap ETFs Jeremy SchwartzLong Ideas Dividends Specialty ETFs Trading Ideas ETFs Best of Benzinga