CEIX - DES: Valuation And Quality Are Attractive Not Performance

2023-04-28 14:47:36 ET

Summary

• WisdomTree U.S. SmallCap Dividend Fund ETF holds 600+ small caps weighted based on dividends.
• The fund is well-diversified across sectors and holdings.
• Valuation and quality metrics look better than a small-cap benchmark.
• However, past performance in total return and dividend growth is sub-par.

This article series aims at evaluating exchange-traded funds, or ETFs, regarding the relative past performance of their strategies and quality metrics of their current portfolios. Holdings and weights change over time, so updated reviews are posted when necessary.

DES strategy and portfolio

WisdomTree U.S. SmallCap Dividend Fund ETF ( DES ) has been tracking the WisdomTree U.S. SmallCap Dividend Index since 6/16/2006. It has 627 holdings, a 12-month distribution yield of 3.14% and a total expense ratio of 0.38%. Distributions are paid monthly.

As described by WisdomTree :

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 in U.S. companies, with about 53% of asset value in small caps and 47% in micro caps. The heaviest sector is financials, followed by industrials and consumer discretionary (see next chart). Other sectors are below 10%. Compared to the small-cap benchmark iShares Russell 2000 ETF ( IWM ), DES massively underweights healthcare and technology. It overweights mostly financials, consumer discretionary, consumer staples, real estate, and materials.

The fund is well-diversified: only 7.7% of asset value is in the top 10 holdings, listed below with fundamental ratios. The top name weighs less than 1%, so risks related to individual stocks are very low.

Historical performance

Since its inception in June 2006, the fund has lagged the two major small-cap benchmarks: the Russell 2000 Index ( IWM ) by 0.6% in annualized return, and the iShares Core S&P Small-Cap ETF ( IJR ) by 1.9% annualized. It also shows a deeper maximum drawdown.

Data calculated with Portfolio123

In the last 5 years, DES has also lagged 3 well-known dividend-oriented small-cap ETFs (see next chart):

• ProShares Russell 2000 Dividend Growers ETF ( SMDV ), reviewed here
• WisdomTree U.S. SmallCap Quality Dividend Growth Fund ( DGRS )
• ALPS O'Shares U.S. Small-Cap Quality Dividend ETF ( OUSM ), reviewed here

From 2012 to 2022, the annual sum of distributions has increased from $0.69 to 0.82% per share. This is a dividend growth of 18.8% in 10 years, whereas the cumulative inflation has been about 29% at the same time (based on CPI). The annualized dividend growth rate of 1.74% is underwhelming.

Comparing DES with a reference strategy based on dividend and quality

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, a good Piotroski F-score, and a sustainable payout ratio. Subsets are rebalanced annually to make them comparable with a passive index.

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 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 portfolio

DES is cheaper than the Russell 2000 regarding the usual valuation ratios:

Data: Fidelity

It also shows better quality metrics according to my calculations, reported in the table below. In particular, ROA is much higher.

Data calculated on the 300 largest holdings representing 80% of asset value.

For further details see: