This Global Small-Cap ETF Is On Fire

Small-cap stocks have been solid performers this year, as has previously been noted here. But adding dividends -- and a dash of global exposure -- to the small-cap equation is proving to be an even more rewarding combination. 

The WisdomTree Global SmallCap Dividend Fund GSD is proving as much. Though still in its infancy, debuting in November, the WisdomTree Global SmallCap Dividend Fund is proving to be a great alternative to traditional U.S. small-cap funds and ex-U.S. international equivalents. Domestic dividend stocks are historically less volatile than their non-dividend counterparts, and the same is often true at the international level. For investors looking to dodge the commitment of an international ETF, GSD allocates over half of its weight to dividend-paying U.S. small caps.

Japan, which has recently been bolstering dividend growth, is GSD's only other double-digit country allocation at 10.4 percent. GSD follows the dividend-weighted WisdomTree Global SmallCap Dividend Index, which weighs companies based on annual cash dividends paid.

"Regional weights are set according to the respective float-adjusted market capitalization weights of the universe of dividend and non-dividend payers of the regional allocations to the U.S., developed and emerging market,” according to WisdomTree.

That weighting methodology has the potential to be durable over long-term holding periods while possibly muting some of the volatility associated with smaller stocks and ex-U.S. investments.

“Selecting small caps that pay dividends—and then weighting them by the dividends they pay—may add additional alpha over time, above and beyond what can be achieved by accessing small caps based on traditional beta indexes,” said WisdomTree Chief Investment Strategist Luciano Siracusano in a recent note. 

GSD's underlying strategy is working this year. The ETF is higher by 10.7 percent year-to-date, an advantage of 370 basis points over the Russell 2000 Index.

Compared to MSCI ACWI Index, GSD is overweight financial services stocks by more than 600 basis points. GSD is also overweight consumer discretionary names by more than 200 basis points. GSD's underlying index sports a dividend yield of 3.47 percent, or about 200 basis points higher than the comparable yield on the Russell 2000. This supports the notion that dividend weighting is an effective strategy for income investors.

“Another advantage of weighting by dividends typically is that WisdomTree is able to raise the dividend yield on the market. In the case of global small caps, the WisdomTree Global SmallCap Dividend Index exhibited a dividend yield of 3.5 percent, versus 2.6 percent for the MSCI ACWI Index as of 7/12/2016,” adds Siracusano.