Looking for Sturdy Small Caps? The Answer Is Surprising

While the S&P 500 and other domestic large-cap benchmarks have been on impressive runs of late, the same isn’t true of small caps.

Over the past three years, the S&P SmallCap 600 Index is up just 2% while the Russell 2000 Index is off 4.5% over that span. So much for the advantages of the size factor. Actually, those perks still hold true. It’s merely a matter of where investors look.

Consider the WisdomTree Emerging Markets SmallCap Dividend Fund (DGS). The fund tracks the WisdomTree Emerging Markets SmallCap Dividend Index. And for the three years ending March 12, DGS returned 18.1% while the large-cap MSCI Emerging Markets lost a comparable amount. Translation: DGS has been a better bet than domestic small-caps and emerging markets large-caps over the past three years.

DGS Has the Goods for Small Caps

Regardless of home domicile, dividend stocks can offer investors superior volatility profiles and DGS lives up to that billing. While emerging markets equities are often thought of as more volatile than developed market peers, the reality is over the prior three years, DGS sported noticeably less annualized volatility than the aforementioned domestic small-cap gauges, the MSCI Emerging Markets Index, and the S&P 500. DGS offers other benefits, too.

“While U.S. small-cap indexes are littered with many unprofitable companies, WisdomTree’s EM small-cap Index filters for profitable dividend payers that favor higher-quality companies as opposed to the more speculative titled U.S. small-cap indexes,” noted WisdomTree Global Chief Investment Officer Jeremy Schwartz.

The $2.85 billion DGS turned 16 years old last October confirming it has a lengthy track record to evaluate. Over its lifespan, DGS has endured calamities such as the global financial crisis and a spate of inflationary environments across various developing economies. That's in addition to headwinds caused by the coronavirus pandemic. To its credit, DGS has been an impressive performer relative to large-cap emerging markets stocks.

“Since the inception of the WisdomTree Emerging Markets SmallCap Dividend Index, it outperformed the broad emerging markets by 347 basis points annualized,” adds Schwartz. “Almost half the outperformance came from the top dividend-yielding stocks. Which our Index had more than 40% exposure to on average, whereas the cap-weighted Index had less than 16% exposure.”

DGS’s quality purview is also seen at the geographic and sector levels. The ETF allocates more than 39% of its weight to Taiwan and South Korea. They are two of the least volatile developing economies. Its sector exposures favor technology and industrials over volatile, commodities-intensive groups such as energy and materials.

For more news, information, and analysis, visit the Modern Alpha Channel.

Read more on ETFTrends.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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