A Superb Small-Cap ETF With Income

Small-cap stocks and exchange-traded funds are integral parts of properly diversified equity portfolios and the asset class is receiving increased attention after posting banner November returns. Still, many investors do not associate small-caps with dividends.

DES And Small-Cap Strategies

For ten and a half years, the WisdomTree SmallCap Dividend Fund DES has proven to investors that they can have their cake and eat it too when it comes to small-caps and dividends. Among U.S. small-cap strategies, DES is the undisputed king small-cap dividend ETFs, a fact confirmed by the ETF's $1.8 billion in assets under management.

While the number of small-caps paying dividends has increased in recent years, the number of dividend payers residing in this cap spectrum is significantly less than investors are accustomed to finding in the large-cap universe. That is part of the reason DES can be considered a value strategy and an outperforming one at that.

The Well-Worn Path Of Success

Interestingly, despite its value tilt, DES is outperforming small-cap growth stocks over the past three years, and over the past decade, DES's underlying index has not lagged the Russell 2000 Growth Index by much.

“This well-crafted fund effectively diversifies risk and rebalances into stocks as they become cheaper relative to their dividends, which should give it an edge against its peers. It offers a large cost-advantage compared with actively managed peers, but there are cheaper index alternatives,” said Morningstar in a recent note.

Morningstar has a “bronze” rating on DES. Importantly, DES has a long track record of outperforming rival small-cap funds. For the five years ended March 31, 2016, the ETF topped 99 percent of rival funds.

A Strategy Paying Off

DES sports a distribution yield of 2.41 percent and pays a monthly dividend. The distribution yield of 1.28 percent on the Russell 2000 looks paltry by comparison.

“So far, the fund’s approach has paid off. Over the trailing 10 years through September 2016, it bested the small-cap value category average and Russell 2000 Value Index by 0.8 and 1.5 percentage points annually. More favorable stock exposure in real estate and industrials sectors contributed the most to this outperformance,” noted Morningstar.

DES currently allocates 18.4 percent of its weight to industrial stocks, its largest sector allocation. Real estate is the ETF's third-largest sector weight at 13.6 percent.