DGRS - DGRS: Investing In Quality Dividend-Paying Small-Cap Growth Stocks

2023-04-20 10:03:39 ET

Summary

• WisdomTree U.S. SmallCap Quality Dividend Growth Fund ETF has an actively managed portfolio. However, unlike most funds, the DGRS exchange-traded fund picks stocks in those sub-segments that are mostly neglected by others.
• The overall price performance of its top investments has been impressive both over both the long run and the short run. DGRS also has registered strong price growth.
• Despite monthly payouts, DGRS has been consistently generating low yields within a range of 2 to 3 percent, which might deter some income-seeking investors.
• Growth-seeking investors will appreciate that despite negative returns in 2018 and 2022, DGRS has generated a double-digit average total return over the long run.

By Snehasish Chaudhuri, MBA (Finance).

WisdomTree U.S. SmallCap Quality Dividend Growth Fund ETF ( DGRS ) is an exchange-traded fund ("ETF") that invests in dividend-paying growth stocks of small-cap companies from diversified sectors. The fund claims to invest in quality stocks that are not highly sought-after but have strong brand names and growth potentials. It invests almost three-fourth of its assets in stocks from four sectors - financial, consumer Cyclical, industrial and materials. DGRS offers monthly pay-outs and generated an average yield of 2.4 percent over the past 9 years. Its trailing-12-months yield is 2.82 percent.

Despite a very poor 2022, the DGRS fund has been able to generate almost double-digit annual average total return since 2016. Due to its consistency over the long run, DGRS can be used as a substitute to high-yielding large-cap or mid-cap funds.

This Actively Managed Small-Cap ETF was Established Almost 10 Years Back

WisdomTree U.S. SmallCap Quality Dividend Growth Fund was launched by WisdomTree Investments, Inc. on July 25, 2013. The fund is managed by WisdomTree Asset Management, Inc. and Mellon Investments Corporation. DGRS uses WisdomTree U.S. SmallCap Quality Dividend Growth Index as its benchmark and creates its portfolio through representative sampling techniques. The index is a fundamentally weighted index that consists of the small-capitalization segment of dividend-paying U.S. common stocks with growth characteristics. DGRS has a small asset base of $222 million, but has a relatively high turnover ratio of 60 percent. This suggests that the portfolio is actively managed. But, despite that, the expense ratio is only 0.38 percent. This fund is currently trading at $41.5, almost at par with its net asset value.

DGRS Has Exposures in Investment Banking and Asset Management Firms

WisdomTree U.S. SmallCap Quality Dividend Growth Fund provides an option to invest in some growing but less sought-after stocks. These stocks are generally not included in most ETFs or closed-end funds ("CEFs"). Also, these stocks are not from the traditionally sought-after sub-segments within the broader industry/sector. A large number of top investments of DGRS are in the area of investment banking, custody banking, mortgage lending and asset management services. Names included Moelis & Company (MC), Federated Hermes, Inc. (FHI), Artisan Partners Asset Management Inc. (APAM), Cohen & Steers, Inc. (CNS), Virtu Financial, Inc. (VIRT), Victory Capital Holdings, Inc. (VCTR), Walker & Dunlop, Inc. (WD), Hamilton Lane Incorporated (HLNE). Interestingly this list does not include any commercial bank or provider of insurance services.

Performance of Finance and Lifestyle Stocks Has Been Quite Impressive

WisdomTree U.S. SmallCap Quality Dividend Growth Fund has some interesting investments in stocks belonging to the lifestyle industry. Funds in general prefer to stay away from such stocks due to their volatility and uncertainty over income and earnings. This list included a reputed beauty and wellness brand - Nu Skin Enterprises, Inc. (NUS), renowned fashion footwear brand - Steven Madden, Ltd. (SHOO), lifestyle apparel brand - Kontoor Brands, Inc. (KTB), renowned fragrance brand - Inter Parfums, Inc. (IPAR), established luxury apparels and accessories manufacturer - Carter's, Inc. (CRI), computer and electronics retail store - Upbound Group, Inc. (UPBD), and renowned restaurant & gift-shop chain - Cracker Barrel Old Country Store, Inc. (CBRL).

During the past six months, most of the above-mentioned stocks delivered price growth in excess of 5 percent. Only CRI, VIRT and WD missed the mark. IPAR grew by almost 90 percent. FHI, UPBD, KTB, APAM, SHOO and HLNE also registered price growth in excess of 20 percent. Hardly many large cap stocks delivered such high growth during that period. Again, over the long run, barring CRI, VIRT, CBRL, NUS, all other stocks registered strong price growth. During almost 10 years of the fund's existence, all other stocks registered a price growth in excess of 50 percent. This growth might seem low, but we also need to consider the fact that most stocks suffered huge price losses during 2022.

DGRS's Portfolio Consists of a Unique Group of Materials and Energy Stocks

Another group of stocks in DGRS's top investments belong to various types of materials and energy producers. This list includes producers of fertilizers and agricultural chemicals - The Scotts Miracle-Gro Company (SMG), metallurgical products manufacturer - Arch Resources, Inc. (ARCH), speciality chemicals producer - Sensient Technologies Corporation (SXT), manufacturers of recreational vehicles - LCI Industries Inc (LCII), developer of tungsten carbides, ceramics, and super-hard materials - Kennametal Inc. (KMT), commodity chemicals manufacturer - Mativ Holdings, Inc. (MATV), value-added steel processor - Worthington Industries, Inc. (WOR), producer and exporter of bituminous coal - CONSOL Energy Inc. (CEIX), manufacturer of petroleum additives NewMarket Corporation (NEU), and public utility holding company - MGE Energy, Inc. (MGEE). Again, there is hardly any firm engaged in the business of extraction of basic metals, petroleum or gasoline products.

Barring MATV, all other stocks registered positive price growth during this year. During the past six months, barring ARCH, MATV and CEIX, all other stocks delivered price growth in excess of 5 percent. SMG and WOR grew by almost 63 percent and 40 percent, respectively. Again, over the long run (almost ten years of the fund's existence), barring KMT and MATV, all other stocks registered price growth in excess of 35 percent.

As a result of overall impressive price growth of its top investments, WisdomTree U.S. SmallCap Quality Dividend Growth Fund registered a price growth of 6.6 percent during the past six months and 63 percent since its inception during July, 2013.

DGRS is an Interesting Option to Invest in Growing but Less Popular Stocks

The portfolio of WisdomTree U.S. SmallCap Quality Dividend Growth Fund is well-diversified among all the major sectors. It has an actively managed portfolio. However, unlike most funds, it picks stocks in those sub-segments that are mostly neglected by other funds. For example, top investments of DGRS include stocks from investment banking, custody banking, mortgage lending and asset management services; instead of commercial banks or providers of insurance services. Overall price performance of its top investments has been impressive both over the long run and the short run.

Despite monthly pay-out, DGRS has been consistently generating low yields within a range of 2 to 3 percent, which will most likely deter income-seeking investors. In absence of price growth, investors will have almost nothing. For the records, the fund generated negative total returns of 11 and 13 percent during 2018 and 2022, respectively. However, despite these, DGRS recorded a double-digit total return over the long run.

In my opinion, the WisdomTree U.S. SmallCap Quality Dividend Growth Fund ETF will continue to generate low yield and high price growth over the long run. This most likely will happen in case top investments of this fund continue to generate high price growth. WisdomTree U.S. SmallCap Quality Dividend Growth Fund thus becomes a good option for investing in growing but less sought-after stocks.

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