DES - DES: A Way To Play Small-Cap Value

2023-12-14 16:32:49 ET

Summary

• Small-caps have underperformed in 2023 but tend to outperform in election years, making them interesting for investors.
• WisdomTree U.S. SmallCap Dividend Fund ETF offers exposure to small-cap dividend-paying companies in the U.S.
• The DES ETF has a diversified portfolio with holdings in sectors like Financials, Industrials, and Consumer Discretionary, but limited exposure to the technology sector.

Small caps look interesting, assuming the Fed stuck the soft landing. They tend to outperform large-caps in election years, and they've been horrible laggards in 2023. The WisdomTree U.S. SmallCap Dividend Fund ETF ( DES ) is one way to get access to small-cap dividend-paying companies in the U.S.

DES is a smart beta exchange-traded fund, or ETF, that offers exposure to the small-cap value segment of the U.S. market. Launched on June 16, 2006, DES tracks the performance of the WisdomTree U.S. SmallCap Dividend Index, aiming to replicate its performance before fees and expenses.

The fund has an Expense Ratio of 0.38% and total assets amounting to over $2 billion, making it a considerable player in the Style Box - Small Cap Value category. The fund has a SEC 30-day yield of 2.96% and a Distribution yield of 2.30%.

ETF Holdings

As a fundamentally weighted index, the WisdomTree U.S. SmallCap Dividend Index focuses on the bottom 25% of the market capitalization of the WisdomTree U.S. Dividend Index, excluding the 300 largest companies. Top holdings include names like:

1. CONSOL Energy Inc. ( CEIX ) : An American energy company engaged in the extraction and preparation of coal.
2. Cogent Communications Holdings ( CCOI ) : A multinational Internet service provider, known for providing business to business services.
3. Radian Group Inc. ( RDN ) : A credit enhancement company offering mortgage insurance, financial guaranty insurance, and related services.
4. Arch Resources, Inc. ( ARCH ) : An American coal mining and processing company.
5. EPR Properties ( EPR ) : A specialty real estate investment trust ((REIT)) that invests in properties in select market segments.

These top holdings, however, only account for approximately 8.23% of DES's total assets under management, reflecting the fund's well-diversified nature. No position currently makes up more than 1% of the portfolio.

Sector Composition and Weightings

In terms of sector exposure, DES has a significant allocation in cyclical sectors, which could be sensitive to economic fluctuations. The heaviest sectors in the fund's portfolio are Financials, Industrials, and Consumer Discretionary. That said, it's worth noting that the fund has a limited exposure to the fast-growing technology sector.

Peer Comparison

When compared to similar ETFs in the space, such as the iShares Russell 2000 Value ETF ( IWN ) and the Vanguard Small-Cap Value ETF ( VBR ), DES performed relatively worse. While IWN and VBR track the Russell 2000 Value Index and the CRSP U.S. Small Cap Value Index respectively, DES follows a fundamentally weighted index, focusing on small-cap dividend-paying stocks. That interestingly hasn't helped much for alpha generation since 2019.

Pros and Cons of Investment

Investing in DES comes with its share of advantages and potential pitfalls. On the bright side, the fund offers a gateway to a diversified portfolio of small-cap dividend-paying companies, which could be particularly appealing to income-focused investors. Moreover, given its distributions, DES can provide a steady stream of income, making it an attractive option for income investors.

However, the fund's high exposure to cyclical sectors could pose a risk, particularly in a volatile economic environment. Moreover, small-cap stocks, which DES is heavily invested in, tend to be more vulnerable to market fluctuations and economic downturns compared to their mid and large-cap counterparts.

Conclusion

The WisdomTree U.S. SmallCap Dividend Fund ETF is a decent fund, but the fundamental focus hasn't really helped yet compared to other small-cap proxies. Despite its merits, the fund's high exposure to cyclical sectors and its concentration on small-cap stocks could pose challenges, particularly in times of economic uncertainty.

Investors considering DES should weigh these factors and consider their risk tolerance and investment goals. Small caps do look poised to relatively outperform next year, so if you want exposure with dividends, WisdomTree U.S. SmallCap Dividend Fund ETF could be a good fit in your core portfolio allocation.

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