Small-cap equities and related ETFs ended 2024 on a sour note. And the Russell 2000 Index is off 4.53% for the month ending January 15. That could be the incentive some investors are looking for to get involved with small-caps.
A prudent way of accomplishing that objective could be to tap the quality factor. That’s an endeavor made easier with ETFs such as the WisdomTree US Smallcap Quality Dividend Growth Fund (DGRS ). Its focus on quality dividend growth has made a material difference for long-term investors. Over the past three years, the ETF’s beat the combined performance of the Russell 2000 and S&P SmallCap 600 indexes.
Importantly, DGRS accomplished that impressive feat with less annualized volatility than the small-cap benchmarks. That could be an important point for investors looking to capitalize on a potential rebound by smaller stocks while looking to avoid some of turbulence often associated with the asset class.
DGRS Can Be Small-Cap ETF Leader
Last year, small-cap stocks got a lift from the Federal Reserve lowering interest rates. More recently, Treasury yields rose in late 2024. And expectations are mounting that the Fed will only lower rates once this year. That would pressure ETFs such as DGRS along the way.
However, many DGRS member firms are less in debt as other small-cap companies. That means the ETF can be less sensitive to rising rates. Additionally, the Fed exercising restraint regarding rate cuts could signal it’s comfortable with the state of the economy. That would be a potential boon for domestically focused small corporations, including DGRS components.
“While higher interest rates can be a drag on equities, they mostly reflect a strong economy. Combined with the boost to revenue growth from somewhat higher inflation, we believe higher profits should more than offset the higher cost of debt servicing for smaller companies,” noted BNP Paribas.
The More Intriguing Catalyst
An oft-cited reason for considering small-caps is the group is inexpensive relative to larger stocks. While that remains true, the more intriguing catalyst for DGRS this year could be EPS growth.
“We expect earnings to drive the next leg higher for small-cap shares. Analysts are looking for robust earnings growth: by 42% in 2025 and by 36% in 2026 compared to just 6% in 2024,” added BNP Paribas. “That is ahead of the historical earnings growth rate of 15%.”
That’s a compelling outlook for investors considering DGRS because the percentage of profitable companies residing in the ETF is high relative to traditional small-cap ETFs.
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