WisdomTree SmallCap Earnings: An ETF Posting Solid Gains, Paying Investors Just Over 2.08%

Jan. 2.13 | About: WisdomTree SmallCap (EES)

When it comes to traditional dividend investing, many investors are quite happy with less-volatile, higher-yielding stocks that pay out regular distributions like clockwork. I think such a theory can apply to one ETF in particular that has returned at least 10% on the year, is focused on high-yielding smaller-cap investments, and carries a very low expense ratio. That ETF is WisdomTree SmallCap Earnings ETF (NYSEARCA:EES).

Over the past year, EES has returned 10.72% to its shareholders while providing investors with a trailing 12-months yield of 2.08% (as of Dec. 31), or $1.182. One of the most compelling things about the WisdomTree SmallCap Earnings ETF is its sector-by-sector weightings, which are led by Financial Services (18.47%) and Consumer Cyclicals (16.22%). The fund's top five holdings represent 8.32% of its assets and consist of positions in Western Refining (NYSE:WNR), Cirrus Logic (NASDAQ:CRUS), Veeco Instruments (NASDAQ:VECO), Revlon (NYSE:REV), and PolyOne Corp. (NYSE:POL). By breaking down the ETFs top holdings, we'll see an average annual return of 57.282% coupled with an average yield of 0.44%. (Investors should keep in mind that only two of EES's top five holdings pay dividends.) If the U.S. financial services and consumer cyclical sectors can demonstrate considerable gains throughout 2013, EES's returns could mimic or even surpass the gains that were demonstrated during 2012.

Are there any negative catalysts to consider when it comes to the WisdomTree SmallCap Earnings ETF?

In order for us to determine the negative catalysts possibly affecting the fund, we need to determine the negative catalysts of two of the funds top holdings.

Western Refining: When it comes to Western Refining, one of the biggest catalysts is the spread between Brent Oil and WTI Oil. If the spread continues to widen, as it has since Aug. 6 (up 27%), we could see continued growth from WNR. If, on the other hand, the spread weakens, which has been the case since Dec. 1 by a total of 15.28%, investors could be facing a rocky road in the near term.

Brent WTI Spread Chart

Cirrus Logic: The main thing Cirrus is known for is its partnership with Apple (NASDAQ:AAPL). As a result, many of the negative catalysts affecting Apple could trickle down and affect Cirrus. For example, although it wasn't as drastic as first thought, the "initial news of less-than-ideal sales results put a damper on Apple, and by extension Cirrus" and caused the stock to take a hit. In my opinion, Cirrus should strengthen its focus on things such as its energy business, which had contributed nicely to its Q2 revenues.

Could the WisdomTree SmallCap Earnings ETF potentially mimic its 2012 performance?

There's a very good chance of that happening, especially if we consider the projected rebound in both the financial services and consumer cyclical sectors during 2013. When it comes to the financial services sector, a certain level of uncertainty still exists and that may play a key role in the sector's overall performance throughout the year. According to the 2013 AFP Business Outlook Survey:

Financial professionals remain cautious in their business outlook for 2013 as they expect the U.S. economy to maintain a modest pace of growth and job creation. Specifically, financial professionals anticipate the economy will grow 1.7% (real GDP growth) and create 1.3 million jobs during 2013.

According to Morningstar, the consumer cyclical sector should demonstrate gains throughout 2013. That said, there are three key points that were discussed with regard to the sector. First is the fact that the consumer cyclical industry appears fairly valued, but we still see selected opportunities for gains in 2013. Second is the notion that e-commerce continues to both augment and disrupt the traditional retail business model. The third notion suggests that management teams are still routing free cash toward share repurchases and dividends to boost total returns.

Final Analysis

For investors looking to establish a position in the WisdomTree SmallCap Earnings ETF, I'd take a closer look at the fund and keep in mind the behavior of both the financial services and consumer cyclical sectors. Given the fact that the fund has made considerable strides over the past year, I'd look to establish a small-to-moderate position at current levels, and add to that position if and when positive news regarding any of its top holdings is reported.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.