Dividend focused strategies have become increasingly popular over the years. One fund in particular, however, puts a unique twist on the strategy – targeting small cap companies instead of the typical large and mega cap dividend payers.
Inside DFE’s Strategy
One of the oldest smart-beta ETFs, launching back in 2006, the WisdomTree Europe SmallCap Dividend Fund (DFE ) focuses its attention on small-cap European equities that have a history of paying dividends. Like many of WisdomTree’s funds, DFE tracks a proprietary index; in this case, the WisdomTree Europe SmallCap Dividend Index.
The smart-beta index begins by looking at the European component of the WisdomTree DEFA Index- which tracks dividend paying companies from the EAFE region. It then kicks-out the largest 300 stocks and centers its attention to the bottom 25% of firms in terms of market cap. The index then is weighted based on the amount of annual cash dividends paid. This means that small-cap firms with larger pay-outs get more exposure than those with smaller ones.
Despite focusing on the bottom fourth of European equities and screening for dividends, DFE actually has quite a large group of holdings. The ETF holds roughly 361 different dividend-paying European small-caps. As of July of 2015, stocks within the industrials sector represent the largest weighting at 27%. Both financials (19%) and consumer discretionary (17%) round-out the next largest sector allocations.
And as a pan-European ETF, DFE provides exposure to a variety of developed market nations on the continent. As expected, the United Kingdom ranks as the largest nation at 27% of assets. Sweden (12%), Germany (9.65%), Italy (9.43%) and Finland (6.77%) round-out the top five nations in DFE’s holdings.
Considerations For DFE
Given what DFE is tracking, there are some things that investors need to be aware of before they pull the trigger on the ETF. For starters, the volatile nature of small-caps. As an asset class, small-caps tend to suffer from “jumpier” and “lumpier” returns than larger firms. For some investors that roller coaster maybe more than they can handle. At the same time, small-caps tend to fare worse in poor economic conditions as they don’t have the size to weather recession and other downturns as easily as larger companies.
Secondly, as a pan-European ETF, DFE is subject to all-sorts of currency risk as it is unhedged. Its holdings are traded in and report their earnings in euros, pounds, krona, etc. Investors need to realize that a strong or weak dollar will crimp or boost returns based on the relationship between the currency pairs.
Finally, while it is a dividend play, DFE’s pay-outs have been lumpy. This again is due to the currency factors and the nature of how European firms distribute dividends. For example, its 06/26/2015 dividend payout was $1.07 per share. The payout in March of 2015 was $0. With that mind, DFE isn’t so much a straight income play as it is more of a total return element in a portfolio. The dividends compliment the capital appreciation of underlying shares.
How to Use DFE in a Portfolio
While domestic small-caps have long been a “core” holding in many portfolios, international small-caps have been strangely absent. That’s a shame as they provide many of the same benefits as their domestic brethren. DFE makes adding them an easy bet. As such, DFE can be used as a core or complimentary position to an investor’s large-cap international holdings
Using DFE as a core position in a portfolio is a relatively inexpensive proposition as well. Expenses for the ETF run 0.58%- or $58 per $10,000 invested – putting it slightly higher than the average expense ratio for the Europe Equities ETF category.
The Bottom Line
The WisdomTree Europe SmallCap Dividend Fund (DFE ) is great way to add exposure to an often ignored asset class- international small-caps. DFE focuses strictly on developed market European stocks and adds dividend twist.