ETF of the Day - European Small Cap Stocks (DFE, LOGI)

The European equity rebound continues and within the region the small cap stocks have been quietly performing very well. The WisdomTree Europe Small Cap Dividend ETF DFE focuses on small cap stocks that pay high dividends.

The index that the ETF tracks is composed of the bottom 25 percent of stocks based on market capitalization in the WisdomTree Europe Dividend Index. The companies are then weighted based on annual cash dividend paid. The current yield on the ETF is 2.6 percent.

The ETF is heavily weighted in the U.K., Sweden, Italy, and Germany, with the four countries making up over 60 percent of the allocation. The four top sectors are the industrials, consumer discretionary, financials, and information technology. The ETF is fairly diversified with the top ten making up only 18 percent of the portfolio.

The top stock is Logitech International LOGI, which accounts for 3 percent of the portfolio. The stock is up 80 percent for the year and trading at the best level in two years. The remainder of the top ten holdings do not trade on a major U.S. exchange. This is what makes DFE so attractive to the average investor, it gives their portfolios exposure to stocks otherwise overlooked. The added diversification will help lower overall risk of a portfolio.

By investing in DFE, investors are betting on a continued rebound in the region and that the worst is behind it. The small cap stocks tend to carry a higher beta and therefore should lead any rally that the region could see in the coming months. The dividend that the ETF pays is a bonus for investors that also want to bring in above-average income.

By focusing on small cap stocks that pay dividends it eliminates companies that may be on the riskier side of the spectrum. The ability to pay a dividend shows the financial strength of a company. The high-risk small cap stocks that have no earnings will not have the ability to pay a dividend and therefore they will not be included in the portfolio.

In the end, DFE is one of the best options for investors willing to take a little extra risk in a region that could be the leader next year.