The phenomenal success of WisdomTree Japan Hedged Equity (DXJ) has been a huge story in ETFs this year. However, WisdomTree Investments (WETF) also oversees a family of ETFs that take a different approach to popular dividend strategies.
The firm is "arguably the most innovative ETF provider out there," writes Andres Cardenal for The Motley Fool.
"In the world of dividend investing, most people usually think about big companies in conservative sectors, and most dividend ETFs typically go in that direction," Cardenal said. "But it sometimes pays to be creative, and dividend-weighted ETFs with a focus on smaller companies could be a better alternative in terms of generating superior returns in the long term."
WisdomTree's index methodology for its U.S. dividend family is notably different than a market-capitalization weighted approach: the company includes only dividend-paying companies in its universe, and weights these constituents based on their indicated dividend streams.
Dividend-focused indices usually feature large, mature companies that have a slower growth rate and a steady dividend payout. WisdomTree has developed fundamentally-weighted indices that breakout from the traditional market-cap approach. This allows the index focus to zero in on earnings or payouts rather than market capitalization. Some of the smallest companies have higher dividend payouts than the mature large-cap stocks.
Cardenal reports that although smaller companies can be riskier and more volatile than larger ones, the growth potential is greater, meaning higher returns for the long-term. Both DES and the WisdomTree MidCap Dividend (DON) have outperformed other dividend indexes over the past five years.
DES has a dividend yield of 3.7%, costs 0.38% and holds over 640 companies. DON has a yield of 3.2%, charges 0.38%, and holds 360 mid-cap stocks. Cardenal points out that a well-known fund such as the iShares Dow Jones Select Dividend Index (DVY) has a yield of 3.3% and charges 0.4%. The focus of DVY is on utilities and consumer defensive, which are slower-growth sectors.
The WisdomTree indexes give investors a bigger yield when focusing on smaller companies, reports Cardenal. Small-cap companies have proven to generate better long term returns over the years, supporting the case for small-cap dividend ETF investing. Over the past 12 months, DES is up 27.3%, DON is up 27.7% and DVY is up 22%.
Tisha Guerrero contributed to this article.
Full disclosure: Tom Lydon's clients own DVY.