This fund finds small-cap U.S. dividend payers while maintaining broad diversification.

fundcoverage@morningstar.comDES
by Adam McCullough
5/15/2019
WisdomTree SmallCap Dividend

WisdomTree SmallCap Dividend ETF is a compelling option for exposure to U.S. small-cap dividend paying stocks. This strategy weights its holdings by their expected dividend payment, which allows it to target dividend payers without loading up on the riskiest dividend payers. The fund’s low fee adds to its allure in the category and supports its Morningstar Analyst Rating of Bronze.

This portfolio targets dividend payers without incurring too much risk. Although the fund doesn’t screen its holdings for profitability or dividend sustainability, a few dividend cuts across its portfolio shouldn’t significantly impact its performance because it is broadly diversified and skews toward larger, more stable names in the small-value category. Its broad reach limits its exposure to firm-specific risk and the highest-yielding stocks, which are more likely to cut their dividends than their lower-yielding counterparts. At the end of April 2019, it had greater exposure to consumer discretionary, real estate, and utility stocks than the Russell 2000 Value Index, and less exposure to the health care and information technology sectors.

This strategy weights its holdings by the total value of dividends that each stock is expected to pay during the next year. This fundamental-weighting approach balances firm size (larger companies tend to make higher aggregate dividend payments) against yield. When the fund rebalances back to its target dividend weightings each December, it adds to names that have become cheaper relative to their dividends, and trims positions that have become more expensive. This contrarian rebalancing discipline contributes to the fund’s value tilt.

From the its launch in June 2006 through April 2019, the strategy has topped the small-value category average and Russell 2000 Value Index by 1.2 and 1.0 percentage points annually, respectively, with similar risk. The fund’s favorable stock exposure within the energy and consumer discretionary sectors contributed to most to its outperformance.



Portfolio Construction

This fund earns a Positive Process Pillar rating because it follows a well-crafted dividend-weighted strategy that effectively diversifies risk and rebalances into stocks as they become cheaper relative to their dividends. The fund tracks the WisdomTree SmallCap Dividend Index. This index selects the smallest 25% of companies ranked by market capitalization from the WisdomTree Dividend Index after removing the largest 300 firms. Qualifying stocks must have an indicated regular cash dividend, a market capitalization greater than $100 million, and meet trading liquidity requirements. Stocks do not need a long history of dividend payments to qualify for inclusion. The index weights each constituent by the value of dividends it expects to pay over the next year, relative to the aggregate value for the portfolio. WisdomTree caps sector weightings to 25% of the portfolio and limits the weighting of its largest holdings. The cumulative weighting of the fund’s stocks with greater than 5% weights is capped at 50% of the total portfolio. The portfolio rebalances annually in December. Because the fund focuses on dividend payments rather than more-volatile dividend yields, its turnover is low and has averaged a fraction of the average fund in the category during the past decade through 2018.

Fees

WisdomTree levies a low 0.38% expense ratio on this fund. This fee is a fraction of the 1.04% median toll that the fund’s small-value peers charge and supports its Positive Price Pillar rating. Over the trailing three years ended April 2019, this fund lagged its underlying index 34 basis points per year, a bit less than its average annual fee.

S&P 500 index data: S&P 500 Copyright @ 2019

All data from Morningstar except U.S. intraday real-time exchange quotes, which are provided by BATS when available. End-of-day quotes for Nasdaq, NYSE, and Amex securities will appear 15 minutes after close. Graph times are Eastern Standard. @ Copyright 2019 Morningstar, Inc.