The Federal Reserve’s recent interest rate cut delivered some much needed relief for domestic small-cap stocks. Still, advisors and investors looking for legitimate small-cap leadership may want to get their investing passports ready, because Europe beckons.
That trip is easily taken with the WisdomTree Europe SmallCap Dividend Fund (DFE ). Buoyed by resurgent European large-caps and the declining U.S. dollar, DFE was higher by 28% year-to-date as of Sept. 24. That’s double the combined performance of the two major domestic small-cap indexes and DFE is accomplishing that feat with significantly lower annualized volatility, confirming it’s been the superior risk-adjusted bet relative to U.S. smaller stocks.
Indeed, DFE and European small-caps have been the beneficiaries of a plethora of positive catalysts to this point in 2025.
“If we think about the environment for European equities, or more specifically, small-cap stocks, it looks pretty good. We had better-than-expected growth figures in the first half,” noted Daniel Morris, BNP Paribas chief market strategist. “The European economy generally speaking proving more resilient than people had thought. We’ve already had a series of interest rate cuts from the ECB. And consumer demand – retail sales – similarly holding up in the face of a lot of challenges.”
DFE Can Keep Good Time Rolling
Given DFE’s hot start to 2025, investors may be pondering if the ETF has more gas in its tank. It does, and that fuel comes by way of multiple sources. Those include Germany, the Eurozone’s largest economy and a top-five county weight in DFE.
“In euro terms, the main driver is the announcement of the German government to invest €500 billion over 20 years in infrastructure, construction, renewable energy, healthcare,” observed Damien Kohler, head of European small-caps at BNP Paribas. “This is important for small caps. Small caps have a high exposure to the industrial sector. So, this plan should benefit small caps, especially all the companies exposed to the German market. It’s very supportive for growth.”
DFE’s status as a dividend ETF is also relevant. It sports a distribution yield of 8.70%, or more than double what’s found on the bulk of European sovereign debt. While DFE’s distribution is eye-popping even relative to large-caps, let alone smaller U.S. stocks, it’s worth noting that the ETF’s member firms aren’t burdened by their dividend obligations.
“We can even find companies where the dividend yield is more than 10% without risk on the dividend. Many small caps are well capitalized,” added Kohler. “They can return cash to shareholders through dividends or share buybacks. And this is what’s going on.”
DFE, which turned 19 years old in June, allocates more than 41% of its weight to industrial and financial services stocks.
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