International equities and ETFs are beating domestic stocks this year, helped in significant part by resurgent European markets. Not surprisingly, much of the well-deserved attention garnered by European stocks this year has been commanded by large-caps. That happens in the U.S. as well because investors have long gravitated to large-cap fare. But that also implies market participants may be glossing over opportunities with ex-U.S. smaller stocks. Specific to European small-caps, investors might want to adjust their perspectives as confirmed by the recent performance of the WisdomTree Europe SmallCap Dividend Fund (DFE ).
The 2025 tale of the tape with DFE is simply stunning. Since the start of this year, the WisdomTree ETF surged 30.7%, as of August 22. That really stands out when considering the combined year-to-date gain for the Russell 2000 and S&P SmallCap 600 indexes is 11.4%.
Dollar Drama Lifting DFE
The U.S. dollar is one of this year’s overt laggards among the major currencies. European stocks and DFE are confirming the benefits of a sliding greenback. Dollar weakness is noteworthy because it’s been accrued against the backdrop of the Federal Reserve not yet lowering interest rates. That could happen next month, potentially signaling near-term upside with assets such as DFE.
“Interest rates on government debt in the U.S. remain elevated relative to other countries; there is scope for this differential to continue to [narrow. This would result] in further weakness in the U.S. dollar said Michelle Gibley of Charles Schwab. “There is potential for narrowing should the Federal Reserve restart rate cuts while the European Central Bank appears to be at or near the end of its rate-cutting cycle, and as countries like Germany accelerate fiscal spending, reducing the gap between German and U.S. government bond yields.”
For investors considering DFE, the current state of affairs with the dollar is important on a historical basis. The most recent lengthy period of outperformance by international stocks coincided with an era of dollar weakness. Once the dollar rebounded, ex-U.S. stocks spent more than a decade delivering subpar returns relative to domestic peers.
“From 2013 to 2024, currency exposure subtracted from international stock returns for eight of the 12 [years. The] dollar gained in value most of those calendar years,” added Gibley. “Prior to that dollar bull cycle, a weak dollar for the most part of 2002 to 2011 resulted in currency adding to international stock returns measured in U.S. dollars for seven of the nine calendar years.”
Specific to DFE, a strong dollar may not plague the ETF. Yes, the fund finished 2024 in the red. But over the past three years — a period of dollar strength — DFE easily beat the aforementioned domestic small-cap gauges. And its returns from 2019 through 2024 were largely impressive when considering the greenback was sturdy most of that time.
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