On a year-to-date basis, small-cap stocks are trailing large-caps by a wide margin as highlighted by the gap between the Russell 2000 Index and the S&P 500. The former is higher by 7.2% while the latter is up 16.7% -- a margin that may be prompting many investors to ponder the efficacy of smaller stocks.
After all, small-cap stocks and the related exchange traded funds are consistently more volatile than the large-cap equivalents across all time horizons. That’s the price of admission market participants are subjected to in order to access the growth prospects of smaller firms.
Indeed, it is growth that compels many investors to embrace smaller equities. That’s a logical way of thinking, but it’s notable that small-cap value is one of the most potent, long-term factor combinations. Knowing that, it’s also worth examining the small-cap dividend combination. While many investors associate dividends with large-caps, the fact is an increasing number of smaller firms are delivering payouts.
Add to that, investors have been rewarded by selecting the right small-cap dividend ETFs because some of these funds outpaced the S&P 500 over the past three years. Here are a few to consider.
WisdomTree U.S. SmallCap Quality Dividend Growth Fund (DGRS)
The WisdomTree U.S. SmallCap Quality Dividend Growth Fund (DGRS) recently turned 10 years old, confirming it has a lengthy track record. That run includes some notable accomplishments, including the past three years in which it handily outperformed the S&P 500 as well as major small-cap gauges.
The four-star rated (by Morningstar) DGRS also outperformed the widely observed small-cap value benchmarks over the past decade, indicating investors can be well-compensated for adding quality dividends to the small-cap value combo. Then there’s the element of volatility, which is crucial in small-cap investing.
“Small caps are already a high-risk segment of U.S. equity markets due to their size and business lines, so incremental volatility for most investors is only added with an abundance of caution and a reasonable expectation of additional return compensation,” according to WisdomTree research. “DGRS delivered impressive outperformance with virtually identical volatility to the broader small-cap market, providing strong risk-adjusted returns due to its factor methodology.”
ProShares Russell 2000 Dividend Growers ETF (SMDV)
The ProShares Russell 2000 Dividend Growers ETF (SMDV) tracks the Russell 2000 Dividend Growth Index and is the second-largest small-cap dividend ETF by assets. One reason the fund has been a hit with advisors and investors is its simple methodology: It requires member firms to have boosted payouts every year for at least a decade.
SMDV holds just 103 stocks – the result of a dearth of small-cap equities meeting the ETF’s 10-year dividend increase requirement. Fortunately, the ETF mitigates concentration risk – a potential issue in ETFs with small lineups – as its top 10 holdings account for barely more than 12% of the fund’s weight.
Past performance isn’t a guarantee of future returns, but it’s also hard to ignore with SMDV. The ProShares ETF beat the Russell 2000 Index over the past three years with lower average annualized volatility.
VictoryShares US Small Cap High Dividend Volatility Weighted ETF (CSB)
The VictoryShares US Small Cap High Dividend Volatility Weighted ETF (CSB) is overlooked in the small-cap dividend ETF conversation, but it should be because it’s third-largest ETF in the category. CSB follows the Nasdaq Victory US Small Cap High Dividend 100 Volatility Weighted Index, which as its name implies, focuses on high-yield small-cap dividend payers with favorable volatility metrics.
CSB, which holds 100 stocks, has a lower price-to-earnings ratio and a higher return on equity than the Russell 2000 Value Index. Not to be overlooked is the point that CSB, like the aforementioned DGRS, delivers its dividends on a monthly basis.
CSB’s dividend yield is 3.71%, or nearly 150 basis points in excess of the Russell 2000 Value Index.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Todd Shriber
Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund where he specialized in trading sector and international ETFs leading up to and during the financial crisis. He would later become the web editor at ETF Trends. Currently, he analyzes, researches and writes on ETFs for a variety of Web-based publications and financial services firms.Shriber has been quoted in the Barron's, CNBC.com and the Wall Street Journal. His work has been published on Web sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business and Nasdaq.com.
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