In the wake of Spanish equities tumbling on allegations of
graft aimed at Prime Minister Mariano Rajoy and Italian stocks
coming under pressure on speculation that Silvio Berlusconi will
win that nation's upcoming election, controversy again surrounds
the European investment thesis.
Declining European stock prices amid the familiar themes of
escalating controversy and uncertainty could increase the allure
valuations some analyst have recently said are
"Generally speaking, we believe that European equity markets
are particularly ripe with potential bargains, given the ongoing
uncertainty regarding their potential for sluggish economic
growth," WisdomTree Research Director Jeremy Schwartz said in a
new research note.
Amid those potential bargains, investors willing to embrace
some level of risk can consider European small-caps, a market
segment that is surprisingly underrepresented in the ETF
universe. While small-cap
tracking the likes of Brazil, China and other emerging markets
have proven popular with investors, there is just one Europe
small-cap ETF listed in the U.S. today.
The WisdomTree Europe SmallCap Dividend Fund (NYSE:
) is that fund, and as its name implies, there is compensation in
the form of dividends for investors willing to roll the dice on
small European equities. Home to nearly $52 million in assets
DFE has a 30-day SEC yield of 3.74 percent
Importantly, DFE's index methodology helps expose investors to
those stocks with rising payouts and compelling valuations.
The WisdomTree Europe SmallCap Dividend Index (WTESC) "targets
small-cap dividend-paying European companies and weights these
companies by the dollar value of the cash dividends that they
according to Schwartz
"This dividend-focused methodology helps tap into where we see
valuation opportunities-most typically, firms that increase their
dividends over the course of the year but whose share prices fall
or stagnate would see increases in weight during the annual Index
rebalance, while firms that simply maintain or shrink their
dividends but whose share prices rise would typically see
decreases in weight," he added.
At the country level, DFE offers exposure to 16 nations, six
of which are not eurozone members. The U.K. is by far the ETF's
largest country at almost 24 percent, roughly 900 basis points
ahead of second-place Italy. Overall, about 40 percent of DFE's
country weight goes to non-eurozone members. PIIGS nations
represent about 26 of DFE's weight, though Greece is not found in
the ETF's lineup.
Given that small-caps typically dwell in highly cyclical
sectors, DFE could be an interesting play on thesis that the
worst news is already priced into European stocks. Schwartz notes
that cyclicality was seen in 2012 when DFE and the MSCI Europe
Small Cap Index outpaced two prominent Europe large-cap indexes
by health margins.
The MSCI EMU Index, the index tracked by the iShares MSCI EMU
) performed better than DFE's index during the global financial
crisis, but in the past two years, DFE is the winner, though both
ETFs are in the red.
"If investors moving into European ETFs are starting to bank
on a cyclical recovery coming out of Europe and are trying to get
access to some of the relatively low prices of European equities,
I believe the European small-cap equity story and specifically
DFE is worthy of strong consideration," said Schwartz.
One strategy investors can consider to mitigate Europe risk is
to pair DFE with the WisdomTree Europe Hedged Equity Fund (NYSE:
). Like DFE,
HEDJ focuses on European dividend payers
However, in the case of HEDJ, that ETF is "designed to have
higher returns than an equivalent non-currency hedged investment
when the value of the U.S. dollar is increasing relative to the
value of the euro, and lower returns when the U.S. dollar
declines against the euro," according to WisdomTree.
DFE does not offer a hedge against EUR/USD fluctuations, but
paired with HEDJ, that strategy could give investors some level
of coverage should the common currency's volatility increase.
For more on Europe ETFs, click
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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