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This dividend ETF article series aims at evaluating products regarding the relative past performance of their strategies and quality metrics of their current portfolios. As holdings and weights change over time, I post updated reviews when necessary.
DES strategy and performance
The WisdomTree U.S. SmallCap Dividend Fund (NYSEARCA:DES) has been tracking the WisdomTree U.S. SmallCap Dividend Index since 6/16/2006. It has about 680 holdings, a distribution yield of 2.31% and a total expense ratio of 0.38%.
As described in the prospectus,
The Index is comprised of the companies that compose the bottom 25% of the market capitalization of the WisdomTree U.S. Dividend Index after the 300 largest companies have been removed. The index is dividend weighted annually.
The fund invests exclusively in U.S. companies, 53.6% in micro-caps, 45.5% in small-caps and less than 1% in mid-caps.
The fund has less than 10% of asset value in the top 10 holdings listed below. The top name weighs less than 1.4%, so the risk related to individual stocks is low.
Ticker | Name | Weight | EPS growth % TTM | PE TTM | PE fwd | Yield % |
Cogent Communications Holdings, Inc. | 1.35% | 12.73 | 147.88 | 86.09 | 4.57 | |
Xerox Holdings Corp. | 1.18% | 10.51 | 15.25 | 14.67 | 4.39 | |
South Jersey Industries, Inc. | 0.88% | 17.40 | 16.14 | 16.23 | 4.72 | |
Spire Inc. | 0.87% | 242.44 | 13.14 | 16.42 | 4.20 | |
M.D.C. Holdings, Inc. | 0.87% | 72.50 | 7.11 | 6.68 | 3.68 | |
New Jersey Resources Corp. | 0.86% | -40.74 | 33.54 | 18.07 | 3.55 | |
MSC Industrial Direct Co., Inc. | 0.85% | 8.30 | 19.25 | 14.63 | 3.57 | |
ALLETE, Inc. | 0.83% | -13.31 | 22.47 | 21.10 | 3.79 | |
ONE Gas, Inc. | 0.81% | 7.39 | 20.22 | 20.08 | 3.01 | |
Vector Group Ltd. | 0.81% | 200.05 | 8.46 | 9.90 | 7.10 |
The heaviest sector is financials (27.5%), followed by industrials (17.4%). Compared to the small-cap benchmark iShares Russell 2000 ETF (IWM), DES overweights not only financials but also real estate, materials, consumer staples and utilities. It underweights technology, healthcare and energy.
Chart: Author - Data: Fidelity
DES looks cheaper than IWM (see ratios in the next table). However, valuation is biased by the heavy weight of the financial sector, where these ratios are naturally lower and less relevant.
DES | IWM | |
P/E | 13.79 | 15.98 |
P/Book | 1.75 | 2.36 |
P/Sales | 1.1 | 1.47 |
P/Cash Flow | 9.33 | 11.37 |
Data: Fidelity
Since inception in June 2006, DES has lagged the small-cap benchmark iShares Russell 2000 ETF in annualized return by 1.3 percentage points (with dividends reinvested for both). It also shows a deeper maximum drawdown.
Tot. Return | Annual Return | Drawdown | Sharpe Ratio | Volatility | |
DES | 235.28% | 8.10% | -65.48% | 0.43 | 20.41% |
IWM | 305.33% | 9.43% | -59.05% | 0.49 | 19.86% |
Data calculated with Portfolio123
The next chart plots the equity value of $100 invested in DES and IWM since DES's inception.
Chart: Author
DES was almost on par with IWM until the 1st quarter of 2019, then it started underperforming.
Comparing DES with a reference strategy
In previous articles, I have shown how three factors may help cut the risk in a dividend portfolio: Return on Assets, Piotroski F-score, and Altman Z-score.
The next table compares DES since inception with subsets of the S&P 500 and the Russell 2000: stocks with a dividend yield above the average of their respective indexes, an above-average ROA, a good Altman Z-score and a good Piotroski F-score. Subsets are rebalanced annually to make them comparable with a passive index.
Total Return | Annual Return | Drawdown | Sharpe Ratio | Volatility | |
DES | 235.28% | 8.10% | -65.48% | 0.43 | 20.41% |
Small-cap reference subset | 299.11% | 9.32% | -54.01% | 0.49 | 19.63% |
Large-cap reference subset | 511.41% | 12.36% | -41.37% | 0.78 | 15.08% |
Past performance is not a guarantee of future returns. Data Source: Portfolio123
DES lags this simple dividend and quality strategy applied in both large-cap and small-cap universes. It also shows a higher risk in drawdown and standard deviation of monthly returns (volatility). However, DES's performance is real, whereas the reference subsets performance is hypothetical. My core portfolio holds 14 stocks selected in the large-cap subset (more info at the end of this post).
Scanning DES with quality metrics
DES holds 678 stocks, 495 have fundamental ratios in my data source and 127 of them are risky stocks regarding my metrics. These are companies with at least 2 red flags: bad Piotroski score, negative ROA, unsustainable payout ratio, bad or dubious Altman Z-score (when data are available). Taking weights into account, risky stocks represent about 17% of asset value, which is acceptable.
If I extrapolate the position-weighted ROA and Piotroski F-score of components with known data (73% of the portfolio) to the whole portfolio, DES has a higher quality than the Russell 2000 index regarding these metrics. In particular, ROA is much better:
Aggregates | Altman Z-score | Piotroski F-score | ROA % TTM |
DES (known data) | 2.82 | 5.71 | 6.31 |
Russell 2000 | 2.90 | 4.88 | 0.17 |
Takeaway
DES is a small-cap dividend fund with more than 600 holdings. It is quite concentrated in financials (27.5%) and industrials (17.4%). Other sectors are below 12%. From a fundamental point of view, DES is cheaper than the small-cap benchmark Russell 2000 and has a better quality, measured in aggregate ROA and Piotroski F-score. However, history since inception shows a lower return including dividends due to price underperformance in the last three years. It also points to a higher risk in drawdown and volatility. The expense ratio of 0.38% looks a bit high in regard to past performance and the relative simplicity of its strategy. DES has a good rating at FactSet ("A") but an average one at Morningstar (3 stars). Among the dividend ETFs I have recently reviewed in this series, FVD (read here) OUSA (read here) are more balanced across sectors and look a bit more attractive. For transparency, a dividend-oriented part of my equity investments is split between a passive ETF allocation (DES is not part of it) and my actively managed Stability portfolio (14 stocks), disclosed and updated in Quantitative Risk & Value.
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