The Forgotten Dividend ETFs

Dividend exchange traded funds have undoubtedly become an important part of the overall ETF landscape. Rapid proliferation of this ETF sub-segment has ensured that investors can access everything from ETFs tracking stocks with lengthy dividend streaks to low volatility and high yield fare as well. Thing is most ETFs focused on U.S. equities are heavy on large-caps. The phenomenon is a curious one because at the international level, some ETFs offering exposure to small-caps have proven quite successful. Even more curious is that despite the fact that mid- and small-cap ETFs combined each have about $60 billion in assets under management, these capitalization segments are arguably underrepresented in the dividend ETF realm. "Yet while U.S.-based dividend ETFs collectively represent almost $49 billion in assets, or about 9% of U.S. equity assets under management, there are less than $1 billion combined in the mid- and small-cap dividend category," WisdomTree Research Director Jeremy Schwartz said in a research note. Schwartz notes there "is more than $10.5 billion invested in either ETFs or exchange-traded notes tracking the performance of the Alerian MLP Index, and more than $20 billion in ETFs designed to track the Dow Jones U.S. Real Estate Index and the MSCI U.S. REIT Index," statistics that serve as a reminder regarding how much income investors have embraced MLPs and REITs in recent years. The combined market capitalization of those three indexes is $1.37 trillion, a fair bit below the $1.52 trillion market capitalization of the WisdomTree MidCap Index (WTMDI). The WisdomTree SmallCap Dividend Index tracks a combined market capitalization of over $511 billion, according to WisdomTree. The WisdomTree MidCap Dividend Fund DON tracks the aforementioned mid-cap index. DON, which debuted in 2006 and now has almost $472 million in assets, features a decent 30-day SEC yield of just over three percent. As is the case with all of WisdomTree's U.S.-focused equity dividend ETFs, DON pays a monthly dividend. Notable is the fact that DON's index does not screen based on yield or dividend increase streaks. Rather, the WisdomTree MidCap Index is "dividend weighted annually to reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year," according to the issuer. Financials account for almost 25.6 percent of DON's sector weight and top-10 holdings include Windstream WIN, Best Buy BBY and Western Union WU. As for income investors looking for domestic small-cap exposure, the WisdomTree SmallCap Dividend Fund DES is the ETF to consider. DES, which also debuted in 2006 and now has over $474 million in AUM, uses the same screening methodology as DON and also pays a monthly dividend. Returns prove small-cap dividends can be rewarding. Over the past two years, DES has outpaced the iShares Russell 2000 Index Fund IWM by nearly 800 basis points while being less volatile than IWM. DES has a 25.4 percent allocation to financials. Top holdings include RR Donnelley RRD, Vector Group VGR and Tal International TAL. "We recognize the inherent differences in methodology and market segments between these particular indexes, but we feel that the one common element—that many people consider these types of asset classes, be it real estate, REITS, MLPs and dividends–as income generators," said Schwartz. "Through the common theme of ‘income generation,' we believe there is merit to the comparison, but we acknowledge that people should consider the differences in potential risk profiles between these asset classes when conducting any analysis." For more on dividend ETFs, click here.