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WisdomTree U.S. SmallCap Dividend ETF: We Prefer Its Larger Peer Funds

Published Fri, 15 May 2020 13:50:10 -0400 on Seeking Alpha

DES invests in small cap dividend stocks in the United States.
The fund has a high exposure to cyclical sectors but low exposure to defensive sectors.
Stocks in DES’ portfolio have an inferior growth profile than its larger peers and has underperformed in the past 10 years.

ETF Overview
WisdomTree U.S. SmallCap Dividend ETF (DES) focuses on small cap dividend stocks in the United States. DES tracks the WisdomTree SmallCap Dividend Index. The fund has high exposure to cyclical sectors and hence may continue to underperform in the current recessionary environment and we suspect many of the stocks in its portfolio may be forced to cut their dividends. DES’ portfolio of stocks has an inferior growth profile than its larger peers and has underperformed in the past. Hence, we think it may be better to invest in large-cap dividend funds.
Data by YCharts
Fund Analysis
High exposure to cyclical sectors
Although DES caps an individual sector to about 25% of the portfolio when it rebalances its portfolio every year, it has a high exposure to cyclical sectors. As can be seen from the chart below, financials sector represents about 26% of its total portfolio. This is followed by industrials’ 15%, real estate’s 14.1%, consumer discretionary’s 8.6%, materials’ 8.6% and energy’s 5.2%. These cyclical sectors represent over 77% of its total portfolio. On the other hand, defensive sectors such as consumer staples (6.9% of DES’ portfolio), utilities (6%), communication services (3.6%), and health care (1.8%) only represent about 18% of its total portfolio. This high exposure to cyclical sectors and low exposure to defensive sectors could result in fund overperformance when the economy is booming but could also result in fund underperformance when the economy is falling.

Source: WisdomTree Website
Since we are now in a recession that is caused by the outbreak of COVID-19 and that this recession could be a long one, many... Read more


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