With European stocks showing some signs of life this year, investors are starting to revisit the asset class. Some may be compelled to consider the region's small caps.
Should that theme emerge in earnest, the WisdomTree Europe SmallCap Dividend Fund (NYSE: DFE ) could benefit.
What To Know
DFE, which tracks the WisdomTree Europe SmallCap Dividend Index, is higher by nearly 7 percent year-to-date and is outpacing the S&P Europe 350 Index with less volatility. For DFE to lure investors, those buyers need to be convinced that European stocks have the potential to outperform U.S. equities, something that hasn't happened for awhile.
“However, within European equities, we have seen a divergence between European exporters and the broader market,” said WisdomTree in a recent note . “If investors succumb to thinking about these and other risks, it may lead to less demand for the euro against other currencies, encouraging depreciation. That could encourage further outperformance of these exporters.”
Why It's Important
For yield hunters, DFE makes sense. The WisdomTree fund yields just over 5 percent compared to an average dividend yield of 1.46 percent on the Russell 2000 and S&P SmallCap 600 indexes.
“Looking at performance alone (and forgetting about things like the U.S. government shutdown), it’s easy to make the case to invest in U.S. equities and harder to make a case to invest in European equities,” said WisdomTree. “Of course, this would tend to mean that European equities would be trading at far less expensive valuations than U.S. equities.”
Regarding valuation, DFE trades at lower multiples than the Russell 2000 and S&P SmallCap 600 indexes.
DFE isn't a dedicated Eurozone ETF as three of the five largest geographic exposures in the fund aren't Eurozone economies. Ten of the countries represented in DFE are Eurozone economies.
The fund allocates almost a quarter of its weight to industrial stocks and nearly a third of its combined weight to consumer discretionary and financial services names. From 2013 through 2018, DFE outperformed the S&P Europe 350 Index in four of those six years.
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