Investors are seeking yield in the low-interest rate market, leading them to dividend paying stocks. Small-cap companies tend to pay out higher yields than large-caps, and focused exchange traded funds are offering investors both growth and yield.
As of this writing, the U.S. stock market is unattractively valued compared with its historical average. In order to combat depressed consumer demand, rich-world central banks have driven down real interest rates to punishingly low levels, inflating asset prices. At a price of around 1,400, the S&P 500 yields 1.8% and historically has grown real per-share dividends by about 1%-2% annualized, wrote Samuel Lee for Morningstar.
Small-cap dividend ETFs allow investors access to the domestic population of an economy while getting spread out exposure. ETFs can play on the yield theme while gaining exposure to a good mix of growth, reports Zacks.
Small-cap companies tend to be more volatile than large-caps, and investors must be able to take on more risk if they choose to invest in this asset class. The reward is growth potential over the long term.
Small-cap dividend ETFs:
- WisdomTree Small-Cap Dividend Fund (DES) 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 focus of the fund.
- WisdomTree Europe Small-Cap Dividend Fund (DFE) 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%, 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 (KROO) 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%.
Tisha Guerrero contributed to this article.