3 Impressive Small Cap Dividend ETFs (DES, DFE, KROO)
Eric Dutram: Due to risk in the market and extreme stock volatility over the past few years, many investors seek more stability in their portfolios along with high levels of current income. Unfortunately, bond yields have been quite low, which has pushed many into opting for high dividend paying stocks instead (Emerging Markets Sovereign Bond ETFs: Safe With Attractive Yields)
Beyond individual securities, investment in equity ETFs which have stocks that pay high dividend yields have emerged as a source of decent income for investors at this time. This has proven to be a pretty good strategy as intermediate term bonds are still yielding below broad stock markets and equities have risen higher so far in 2012.
Investors seeking a certain level of consistent income can invest in individual dividend paying stocks or in dividend paying ETFs (11 Great Dividend ETFs). ETFs can often pay superior dividends, and are arguably the best option available to investors as these ensure safety with low costs even if the world market crashes or collapses.
Today, when returns from equities are at risk, dividend-focused ETFs have become a major source of consistent income for investors.
ETFs focusing on dividend stocks are a safer strategic investment in the current ultra-low rates environment, still there are not considered to be risk free investments. Companies are under no legal obligation to pay dividends to their investors, nor is the rate of dividend fixed.
In case of any financial instability, the company may fail to pay dividend, or it may cut the rate of dividend payment. This in turn, could hamper the returns from ETF investments.
Small Cap ETFs
When it comes to putting money into ETFs, there are many large cap and small cap ETFs available that hit companies of different sectors and markets. However, large cap ETFs are known to include companies which do not always directly relate to the real economies of the nation and which can often have higher levels of exposure to foreign markets.
That is because large caps are often multination firms that do business across borders. For example, Coca-Cola does a great deal of its business abroad while a local soda company is going to be entirely dependent on the American market for its business.
In order to avoid this and focus more on local economies, the ETF world has expanded to include small cap ETFs. These funds allow the investor to tap the domestic population of the economy and usually offer more spread out exposure (Emerging Market Small Cap ETFs: Freefall Continues). Additionally, small caps are often capable of higher levels of growth than large caps, a situation which can be especially important in the low growth world we find ourselves in today.
Investors should note that these products can experience levels of volatility that can make large cap emerging stocks seem stable in comparison. Risk tolerance should be very high for those looking to make a play on this space as huge gains and losses can occur, in a very short period of time (Guide to Small Cap Emerging Market ETFs)
Small cap dividend ETFs
Beyond growth, many investors are also scrambling for yield in today’s low rate environment. However, many overlook small cap securities for high payouts, favoring their large cap brethren instead.
Fortunately for investors, there are a few ETFs that are combining this high yield focus with micro sized securities. In this way, investors can have an interesting mix of growth and income that many other funds simply cannot match. If this sounds like a good way to tackle today’s market, any of the following three small cap high dividend ETFs highlighted below could be interesting picks:
WisdomTree SmallCap Dividend Fund (NYSEARCA:DES)
The WisdomTree SmallCap Dividend Fund was introduced in June 2006. The ETF seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the WisdomTree SmallCap Dividend Index (also read Three Resilient European ETFs Still Going Strong).
This benchmark is a fundamentally weighted index which measures the performance of the small-capitalization segment of the U.S. dividend-paying market. The Index comprises of companies that make up the bottom 25% of the market capitalization of the WisdomTree Dividend Index after 300 of the largest companies have been removed.
The index is dividend weighted annually to reflect proportionate shares of the aggregate cash dividends that each component company is projected to pay in the coming year. The cash dividends are based on the most recently declared dividend per share figure.
The fund holds a total of 615 stocks, with 11.3% of the total asset base of $331.1 million invested in the top 10 holdings. Apollo Investment Corp (AINV - Snapshot Report) takes the top spot in the fund and is closely followed by CommonWealth REIT (CWH -Snapshot Report) and Prospect Capital Corp (PSEC - Snapshot Report).
In selection of sectors, the fund is heavily concentrated in Financials with 54.9% assets invested in the segment. The fund charges an expense ratio of 38 basis points and delivered a one-year return of 5.28%. The fund’s yield stands at 3.92%, a good level, considering the small cap nature of the product.
WisdomTree Europe SmallCap Dividend Fund (NYSEARCA:DFE)
Investors seeking exposure in small cap European companies can invest in DFE. The fund tracks the performance of the WisdomTree Europe SmallCap Dividend Index. This result in a fund that holds 317 high dividend-paying stocks that comprise the bottom 25% of market capitalization of the WisdomTree Europe Dividend Index and excludes 300 of the largest companies.
The fund provides broad exposure to European countries – United Kingdom 25.31%, Italy 13.2%, Germany 11.3%, Sweden 10.4%, France 6.75%, Norway 5.98%, Netherlands 5.74%, Spain 5.51%, Finland 5.34%, and Portugal 3.46% (Euro Small Cap ETFs: The Way to Play Europe?)
DFE appears to be spread among individual holdings as just 12.3% of its total asset base is invested in the top 10 holdings. Among individual holdings, Cable & Wireless Communication takes the top spot (2%) closely followed by Nexity (1.49%) and Antena 3 de Television SA (1.30%).
Among sector holdings, DFE is heavily exposed to industrials and consumer discretionary firms with 25% and 19% weightings, respectively. The product charges 58 bps in fees per year and has about $23 million of AUM. It also has had an impressive yield of 5.18% per annum but has produced negative returns of 19.26% in the last one-year period, largely thanks to the ongoing European crisis.
IQ Australia Small Cap ETF (NYSEARCA:KROO)
KROO seeks to replicate the performance of the IQ Australia Small Cap Index. The Index focuses on companies that make up the smallest 15% of the market cap in the nation. This resulted in a portfolio of 107 securities with expense ratio of 69 basis points a year in fees.
The fund appears to be spread out among companies, as investment in the top 10 holdings stands at 22.3%. Seek Ltd, UGL Ltd and Bank of Queensland takes the top three positions in the fund with asset investment of 2.65%, 2.60% and 2.48%, respectively (see Australia ETFs: a Developed Market Play on Asian Growth).
In terms of sector exposure, the fund is quite different from its large cap counterpart EWA. The fund puts its top weightings to basic material (27.9%), cyclical consumer (21%) and industrial (17.9%), stocks.
Over a period of one year, the fund has delivered negative returns of 23.3%.However, dividend yield stands at an impressive 13.41%.
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