With many dividend exchange-traded funds easily outpacing broader benchmarks, such as the S&P 500 this year, a logical deduction would be that some of these ETFs are home to richly valued stocks. That is true of some dividend ETFs, particularly those with heavy weights to the consumer staples and utilities sectors.

Things Are Not Always As They Appear

Investors have overtly favored defensive, low beta sectors this year, leading to frothy multiples for high-yielding staples and utilities names. Dividend investors looking for compelling valuations might be surprised about where to turn: mid- and small-cap dividend payers. Perhaps it was surprising to some investors when the WisdomTree MidCap Dividend Fund (ETF) (NYSE: DON) and the WisdomTree SmallCap Dividend Fund (NYSE: DES) were highlighted as post-Brexit safety ideas.

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Give DES And DON A Second Look

However, those ETFs are historically less volatile than standard mid- and small-cap benchmarks. Likewise, it might surprise some investors to learn that attractive valuations are currently available with DES and DON. Think about it. Conventional investment wisdom holds that dividend stocks are often pricier than dividend payers. Add to that, mid and small caps are often more expensive than large caps. That is the trade-off investors make to gain the long-term return advantages offered by smaller stocks. So it would be logical to believe DES and DON are not attractively valued. Data suggest otherwise.

It's All In Performance

“The WisdomTree Midcap Dividend Index traded at just a 9 percent premium to its 10-year median P/E, slightly higher than the 7 percent premium exhibited by the S&P MidCap 400 Index,” said WisdomTree Chief Investment Strategist Luciano Siracusano in a recent note.

Currently DON's underlying index trades at 21.1 times earnings while the S&P MidCap 400 trades at 21.5 times earnings. Not a huge difference, but DON has outpaced the S&P MidCap 400 by nearly 500 basis points this year while being 240 basis points less volatile.

“The WisdomTree SmallCap Dividend Index, based on its most recent quarter-end P/E, was the only one of the four WisdomTree Indexes to be trading at a discount to its 10-year median P/E,” added Siracusano.

DES tracks the WisdomTree SmallCap Dividend Index, which currently trades at just over 21 times earnings, according to issuer data. The competing Russell 2000 and S&P SmallCap 600 trade at 23.8 and 36.7 times earnings, respectively.

As is the case DON, DES is crushing competing non-dividend ETFs this year. The benchmark ETFs tracking the Russell 2000 and S&P SmallCap 600 are up an average of 2.75 percent year-to-date while DES is higher by 9.6 percent. DES has also been slightly less volatile than ETFs tracking those widely followed small-cap indexes.