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Small-Cap Value Could be Great Again

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Like it’s large-cap counterpart, small-cap value is lagging against large-cap growth. That has taken some of the shine off this factor in the small-cap universe, but there’s some allure with the right funds addressing smaller value, including the WisdomTree U.S. SmallCap Dividend Fund (NYSEArca: DES).

DES seeks to track the price and yield performance, before fees and expenses, of the WisdomTree U.S. SmallCap Dividend Index. The index is a fundamentally weighted index measuring the performance of the small-capitalization segment of the U.S. dividend-paying market.

While it’s often seen as a value play, DES has quality elements, which are vital today. Quality dividend growth ETF strategies in small- and mid-caps are well positioned for today’s market environment.

“With investors questioning the viability of dividends amid political pushes for payout cuts, think about some math,” said WisdomTree in a recent note. “Our mid-cap dividend index has a dividend yield of 4.5%. Many companies will cut or eliminate payments—that is the sober truth. But how much? Even if you slice payments by half, the resulting 2.3% yield is still higher than what could be obtained in the no-cuts 2.1%-yielding S&P 500 Index of large caps.”

What’s Next For Growth

In this type of environment, investors may be looking for more attractive areas to focus on beyond the large-cap segment that has enjoyed a strong rally but is now either fully priced or expensive.

Mid- and small-caps have also exhibited a history of long-term outperformance, compared to large-caps. Specifically, in the 15 years ended March 2019, the S&P MidCap 400 Index returned an average annualized 11.7% and the S&P SmallCap 600 Index returned 10.8%, compared to the 9.8% return for the S&P 500 Index.

Importantly, DES adheres to being a small-cap fund while many value offerings in this category drift well into mid-cap territory. DES helps investors access quality dividend growth stocks that typically exhibit, stable earnings, solid fundamentals, strong histories of profit and growth, commitment to shareholders, and management team conviction in their businesses.

“It boils down to this: It may be time to consider a generational move out of the ‘upper right’ to the ‘lower left’ of the classic Morningstar Style Box,” according to WisdomTree. “In the meantime, make sure that in doing so you actually end up in the style box that you are seeking. I suspect there are a lot of investors who are holding “small-cap value” and “small-cap blend” funds that are actually engaging in quasi-growth strategies.”

For more on income strategies, visit our Retirement Income Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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