Small-Cap Dividend ETFs

by: Steven M. Williams


Small-cap stocks tend to outperform long-term over large-cap stocks.

Companies that pay regular and increasing dividends are more likely to have stable finances and growth outlooks while still having room to grow.

Small-cap dividend ETFs allow you to gain from this outperformance and combine it with the safety that dividends provide.

Small caps and dividends are two separate investment strategies that investors have used in order to get higher returns - but what if you combine them?

There are a few small-cap dividend ETFs. The WisdomTree SmallCap Dividend ETF (NYSEARCA:DES) is the oldest with an inception date of 06/16/2006. The WisdomTree U.S. SmallCap Dividend Growth ETF (NASDAQ:DGRS) created on 07/25/2013 is the second oldest. ProShares Russell 2000 Dividend Growers ETF (NYSEARCA:SMDV) was created on 2/3/2015, and the O'Shares FTSE Russell Small Cap Quality Dividend ETF (NYSEARCA:OUSM) is the newest which started on 30/12/2016.


Chart sourced from ProShares by Ned Davis Research using data from the Russell 3000 index.

Dividend growers and payers have had higher performance and lower volatility compared to non-payers and dividend cutters as the chart above shows.

Since OUSM is so new, it won't be included in the charts. As you can see below, SMDV has clearly outperformed other small-cap stocks (IWM) and small-cap dividend stocks since it was created. It is also more defensive (note the drawdown of the other ETFs in 2016).

Chart DGRS Total Return Price data by YCharts

If you exclude SMDV to get a longer look back, you'll see that both the WisdomTree ETFs offer similar performance to each other and seem to match other small-cap stocks as measured by IWM, although slightly more defensive. It might offer the potential to have less drawdown during a major correction as dividend ETFs typically do.

Chart DGRS Total Return Price data by YCharts

WisdomTree SmallCap Dividend Fund

  • Assets Under Management: $1.95B
  • SEC Yield: 3.67%
  • Optionable: Yes
  • Inception Date: 06/16/2006
  • Expense Ratio: 0.38%
  • Holdings: 670
  • Average Market Cap: $1.6B

DES starts out with small cap dividend stocks and then weights them by the total dividends paid by that company. Stocks must have a minimum market cap of $100M, be ordinary common shares or REIT shares, and have an average daily dollar trading volume of at least $100,000 in the past three months. It does not screen for historical dividend growth.

Chart DES Total Return Price data by YCharts


Source: WisdomTree

While it is not designed to be a value fund, it does slightly tilt towards value since dividend payers are more likely to be value stocks compared with growth stocks which seek to reinvest earnings into growth. Its valuation ratios are very similar to the Russell 2000 (the benchmark)

It has a Morningstar rating of 4 stars meaning it's in the top 32.5% for risk-adjusted returns compared to its category (small value).



Benchmark: Russell 2000, Morningstar Category is Small Cap Value. Source: Morningstar

It has a 5-y sales growth of -3.33%, a 5-y cash flow growth of -1.19%, a 5-y earnings growth of -4.88%, and book-value growth of 0.14%. This may be because the stocks are just temporarily beaten up (which many high dividend stocks are) since it does have a projected long-term earnings growth rate of 9.47%. The historical sales, cash flow, and book value growth are still greater than the Russell 2000 index, but historical earnings are lower.

It's tilted towards cyclical sectors, such as consumer cyclical (19%), real estate (15%), financial services (11%), basic materials (7%), as well as industrials at 18%. It does not have much defensive sector holdings, such as consumer defensive (5%), healthcare (2.00%), and utilities (10%). It has small holdings in energy (4.5%), technology (5%) and communications (2.6%)


Benchmark: Russell 2000, Morningstar Category is Small Cap Value. Source: Morningstar


Source: Morningstar

WisdomTree U.S. SmallCap Dividend Growth ETF

  • Assets Under Management: $93M
  • SEC 30-Day Yield: 2.10%
  • Inception Date: 07/25/13
  • Expense Ratio: 0.38%
  • Holdings: 252
  • Average Market Cap: $1.6B

Chart DGRS Total Return Price data by YCharts

As you can see from the chart above, the performance of DGRS has been almost identical to DES as well as IWM. It has significantly underperformed SMDV as shown in the graph comparing them in the introduction to this article.

It is based on the same index that DES is based on, which is the base universe for this ETF's index. Then the top 50% of stocks which have the highest growth (long-term earnings growth expectations) and quality (3y average ROE and ROA) factors are included. It does not factor in historical dividend growth. The remaining stocks are weighted by total dividend paid by the company (not yield), which is the same as DES. What did this change result in?

The SEC 30-day yield has been reduced from 3.67% to 2.10%. However, sales growth, cash-flow growth, and book-value growth are no longer are negative as they were with DES. Sales growth is 3.03% (compared to -3.33%), cash-flow growth is 2.61% (compared to -1.19%) and book-value growth is 6.03% (compared to -0.14%). Earnings growth is still negative at -1.78% but that is still lower than DES's earnings growth of -4.88%. This has eliminated many beaten up or junk companies.

In terms of valuation, it has a lower P/E than DES, however, other valuation metrics (P/B, P/S, P/CF) are higher.

dgrs-styledets dgrs-ownership dgrs-sectors

Benchmark is Russell 2000 Index. Morningstar Category is Small Blend. Source: Morningstar

DGRS has a very large weighting in industrials (26% vs. 18%), as well as a higher weight in consumer cyclical stocks (25% vs. 19%) compared to DES. It has a much lower real estate holding than DES as well (2.7% vs. 15%). Financials also have a higher weighting in DGRS (16.7%) than in DES (11%). It has very little holdings in defensive sectors which make up a combined 11.5%, which is lower than DES's 17.4%.dgrs-holdings2 Source: Morningstar

ProShares Russell 2000 Dividend Growers ETF

  • Assets Under Management: $424M
  • SEC Yield: 1.97%
  • Inception Date: 2/3/2015
  • Expense: 0.4%
  • Holdings: 59
  • Average Market Cap: $1.9B

Chart SMDV Total Return Price data by YCharts

As you can see from the graph, SMDV has outperformed both the iShares Russell 2000 ETF as well as the SPDR S&P 500 ETF (NYSEARCA:SPY) since its inception. It is also the best performing small-cap dividend ETF since its inception as well.

Compared to DES, SMDV pays attention to the historical growth of dividends. Growing dividends often serve as a symbol to shareholders of a stable financial position and a stable future which can lead to outperformance. DES just focuses on all dividend payers and has no quality measures, so it will likely include some dividend cutters (as companies with very high yields may be unsustainable) which can drag the performance and it has historical negative fundamentals growth as described above in the DES section.

SMDV has had positive fundamentals growth, as shown below. Although its earnings and sales growth have been minimal, it still vastly outperforms the Russell 2000 index's growth. The 5-y cash flow growth has been 5.16% vs. -7.69% for the Russell 2000 and book value growth of 5.68% vs. Russell 2000's -19.85%. I believe this is a result of the correlation between growing dividends and strong fundamentals.

Morningstar says it's a blended style ETF with a value tilt, again as there's a correlation between dividends and value. However, valuation ratios are higher than the Russell 2000.

This ETF has a lower yield, having a 30-day SEC yield of 1.97% vs. 3.67% for DES; however, it should make up for this with a safer portfolio as well as dividend growth in the future.



Benchmark is Russell 2000 Index. Morningstar Category is Small Value.

As you can see from the sectors weights above, SMDV holds a large amount in utilities (26%) as well as other defensive sectors such as Consumer Defensive (11.5%) and Healthcare (5%) for a combined holding in defensive sectors of about 42.5%. This is likely why it has been more defensive than the other ETFs, however, its large holdings in utilities may make it sensitive to rising interest rates.

Source: Morningstar

O’Shares FTSE Russell Small Cap Quality Dividend ETF

  • Assets Under Management: $46M
  • SEC 30-Day Yield: 3.44%
  • Inception Date: 12/30/2016
  • Expense Ratio: 0.48%
  • Holdings: 326
  • Average Market Cap: $3.7B

This ETF is very new having launched right at the end of 2016 on 12/30/2016. O'Shares is a firm which is chaired by famous television personality and businessman Kevin O'Leary (also known as "Mr. Wonderful"). Kevin O'Leary was previously involved in mutual funds (O'Leary Funds); however, those funds ended up underperforming (although Kevin wasn't involved with investment decisions personally) and his firm faced wrongful termination lawsuits. Now Kevin O'Leary has come back with O'Shares, offering ETFs based on smart-beta indexes. OUSM is based on the FTSE Russell US Qual/Vol /Yield Factor 3% Capped Index.

Its performance although mostly flat since it launched has performed better than DES which has declined (at -3.75% total return). It has mostly matched the performance of the Russell 2000, although slightly lower at 1.19% vs. 2.71% total return.

Chart OUSM Total Return Price data by YCharts

Chart OUSM Total Assets Under Management data by YCharts

Although this ETF is still new and it only has a small amount of assets at $46M (I expect Mr. O'Leary may use his prominence to promote it), its index happens to include high dividend stocks as well as positive fundamentals growth - a combination not seen with the other ETFs I've reviewed above. Its AUM has been growing fast since it launched so I suspect that the ETF won't be closed soon. Its expense ratio is the highest at 0.48%, whereas the other ETFs are 0.38% and 0.40%.

The index is based on three factors:

  • Quality (return on assets, asset turnover ratio, accruals, and leverage)
  • Low Volatility (five-year standard deviation of weekly total returns)
  • Yield (12-month trailing dividend yield)

It starts off with the FTSE USA Small Cap Index (1,833 holdings including REITs) and uses the previously listed factors to come up with 326 holdings and weighted according to the above factors while being capped at 3% for any single holding.

Its holdings have a slightly higher average market cap at $3.7B compared to the other ETFs which all have an average of less than $2B. Its holdings ranged in market cap from $333.6 million and $8.7 billion as of Nov. 30, 2016 (most recent I could find but it shouldn't be far off). It has about 45% of its portfolio in mid-cap stocks according to Morningstar.

It has a earnings growth of 2.62% (compared to DES's -4.88%), sales growth of -0.59% (compared to DES's -3.33%), cash-flow growth of 2.03% (compared to DES's -1.19%), and book-value growth of 1.88% (compared to DES's 0.14%). For historical fundamentals growth, it beats DES on all figures since it accounts for quality and low volatility.

While it includes quality factors, it's still able to have a high yield having an SEC yield of 3.44%, only slightly lower than DES's 3.67%.

Its valuation ratios are higher than DES's, having a PE of 21.8 vs. 20.8 and a P/CF of 11 vs. 7.67 (others are shown in style details below which uses DES as the benchmark). However, because its past fundamentals are stronger, it certainly deserves a higher valuation.

ousm-desbenchmark ousm-sectors

Source: Morningstar. Benchmark is DES ETF, Category is Small Blend.

OUSM has a lot of holdings in cyclical sectors like consumer cyclical (18.5% - similar to DES's 19%) and real estate (21% - larger than DES's 15%). Real Estate and its 11% in Utilities (similar to DES's 10%) may be sensitive to interest rate hikes. It also has holdings in Industrials at 15% (similar to DES's 18%). It also includes an 11% holding in technology compared to DES's 5%.



If you are looking for high dividends now, I'd recommend OUSM for that given that its holdings have positive fundamentals growth compared to DES which has mostly negative fundamentals growth. It also includes a quality screen which DES lacks. If OUSM is too new for you, DES still beats the Russell 2000 by having a less negative cash flow growth, book value growth, and sales growth, although its earnings have declined more than the Russell's has - and offers a high dividend.

If you are looking for dividend growth later, I'd suggest the ProShares Russell 2000 Dividend Growers ETF which is really the only dividend ETF that explicitly follows dividend growth as DGRS is based on earnings growth expectations and not dividend growth. SMDV also had the best returns as well as being more defensive.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SMDV, OUSM over 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.

Additional disclosure: Please make sure to consult a qualified financial professional before making any investment decision.