DLS: A Small-Cap Global Ex-US/Canada ETF Generating Above-Average Yield

~ by Snehasish Chaudhuri, MBA (Finance).

WisdomTree International SmallCap Dividend ETF (NYSEARCA:DLS) is an exchange-traded fund ("ETF") that invests in dividend-paying small-cap equity stocks in public equity markets of the global ex-US/Canada region. The fund has a diversified portfolio which is created by using representative sampling. It benchmarks itself against the WisdomTree International SmallCap Dividend Index.

DLS has 872 stocks in its portfolio, so by default a very small percentage of its assets under management ("AUM") is invested in a particular stock. Almost two-third of DLS’s assets are invested in small and micro-cap stocks and 34 percent in mid-cap stocks. Stocks from financial, industrial, material and technology sectors account for almost 62 percent of the entire portfolio. DLS generated a yield of 5 percent during 2022, and an annual average total return of 7.1 percent between 2017 and 2021.

DLS Has A Diversified Portfolio Distributed Between Europe And Asia-Pacific

DLS was launched by WisdomTree Investments, Inc. and is co-managed by WisdomTree Asset Management, Inc. and Mellon Investments Corporation. WisdomTree International SmallCap Dividend Index selects companies in the bottom 25 percent of the market capitalization of the WisdomTree International Equity Index after removing 300 largest (by market cap) stocks. Dividends are paid quarterly, and the portfolio is rebalanced annually based on annual cash dividends paid. The portfolio is almost equally distributed between stocks from European markets and that of the Asia-Pacific region. Almost 56.5 percent of its investments are in three countries - Japan, the United Kingdom, and Australia. Direct exposure to geopolitically challenged nations like Russia, China, Hong Kong, Ukraine, Taiwan, etc. are insignificant.

DLS Invests In Large Pool Of Stocks And Is Exposed To Foreign Currency Risk

WisdomTree International SmallCap Dividend Fund was formed on June 16, 2006. DLS has an expense ratio of 0.58 percent which is relatively higher than average short-cap funds. DLS is a good option for investors seeking exposure to global small-caps with an above-average yield. Foreign investing involves a lot of uncertainties in terms of the geo-political environment and global macroeconomics. It also involves risk of loss from currency fluctuations. Diversification, although it reduces portfolio risk, does not eliminate the risk of such investment loss. Hedging may be beneficial to protect the returns when a foreign currency depreciates against the U.S. dollar. But this strategy also has limitations, as it can cause losses in case the foreign currency appreciates.

Reversal Of U.S. Dominance Over International Markets Should Be Beneficial

Diversification in the small-cap arena allows investments over a much broader base and allows investors to achieve a similar return undertaking a lower level of risk. When it comes to small-cap stocks, there are significant benefits from a risk mitigation perspective to allocate to international small-cap dividend payers combined with the Russell 2000. During the past decade, US stock markets have generated healthy returns, much higher than the international markets. There is a strong possibility of reversal of U.S. dominance over international markets, which will obviously be beneficial for funds like WisdomTree International SmallCap Dividend Fund. Having a large asset base of $1.17 billion will enable DLS to extract maximum benefits. The fund is currently trading at around $60, which is a marginal premium over its NAV.

Investment Thesis

WisdomTree International SmallCap Dividend Fund provides exposure to the stocks that are not traded on the major U.S. stock exchanges and are only available for American investors on the over-the-counter market or foreign exchanges. The fund generates an above-average yield together with a decent annual average total return over the long run. Small-cap stocks in international markets, especially those exposed to emerging markets and cyclical sectors, have greater risk of pay-out reduction. Fortunately, DLS has no such problems.

However, the WisdomTree International SmallCap Dividend ETF suffers few drawbacks, too. The fund has a very high turnover ratio of 55 percent, and its 0.58 percent expense ratio is comparatively higher. Moreover, investing in foreign markets in foreign currencies involves risk of loss from currency fluctuation or geo-political or economic uncertainty. In my opinion, income-seeking investors can invest in WisdomTree International SmallCap Dividend Fund provided it is available at a significant discount. So, waiting for the WisdomTree International SmallCap Dividend ETF price to come down will be of worth.

About the TPT service

Thanks for reading. At the Total Pharma Tracker, we offer the following:-

Our Android app and website features a set of tools for DIY investors, including a work-in-progress software where you can enter any ticker and get extensive curated research material. 

For investors requiring hands-on support, our in-house experts go through our tools and find the best investible stocks, complete with buy/sell strategies and alerts.

Sign up now for our free trial, request access to our tools, and find out, at no cost to you, what we can do for you.