With U.S. equities continuing to march higher, a broad array of small-cap exchange-traded funds have recently been touching
record highs. That is nice, but those new highs do not erase the substantial underperformance of smaller U.S. stocks relative to
their international counterparts this year.
For example, the widely followed Russell 2000 Index is up 6.2 percent year to date, meaning the WisdomTree Europe SmallCap
Div Fd (ETF) (NYSE: DFE) is outpacing the U.S. small-cap
benchmark by a margin of better than 3-to-1.
Making DFE's 2017 feats of strength all the more impressive is that the ETF the better trade on risk-adjusted basis relative to
US-focused rivals. DFE's annualized volatility to this point in the year is 10.5 percent, well below the average about 13.3 percent
for the Russell 2000 Index and the S&P SmallCap 600 Index.
Intriguing Value, Too
In addition to their penchant for volatility, U.S. small caps usually trade at higher earnings multiples than their large-cap
counterparts. International small caps do not suffer from that valuation issue.
Actually, small caps in plenty of ex-U.S. markets, including DFE's universe, are attractively valued.
WisdomTree's universe of international small-cap indexes are “less expensive than its market cap-weighted benchmark on a P/E
basis, with the European index having the greatest discount of 21%. And when you consider the relative value between the U.S. and
international indexes, the Russell 2000 Index is more
than twice as expensive as the highest P/E WisdomTree Index,” said the issuer in a recent
note.
The WisdomTree Europe SmallCap Dividend Index, DFE's underlying index, had a P/E ratio of just over 14 at the end of the second
quarter compared to 29.2 on the Russell 2000, according to issuer data. DFE's index has a dividend yield of nearly 3.6 percent, or
about triple the dividend yield on the Russell 2000.
More Advantages
With economies throughout Europe on the mend, DFE is positioned to continue taking advantage of that trend.
“Small caps generate a greater share of their income domestically than do large caps, and they’re less susceptible to trends in
global trade or the reverberations on trade from currencies,” said WisdomTree.
DFE allocates 38.8 percent of its combined weight to the U.K. and Sweden. The ETF's largest allocation to a Eurozone nation is
11.1 percent to Italy, the Eurozone's third-largest economy. Overall, 15 countries are represented in DFE.
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