ETF Talk: European Small-Cap Stocks Shine

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.

Europe clearly is having economic problems but one ray of hope that has emerged there is from European small-capitalization stocks. An exchange-traded fund (ETF) that lets you invest in that narrow sector is WisdomTree Europe SmallCap Dividend Fund (DFE).

The fund seeks investment results that closely correspond to the price and yield performance, before fees and expenses, of the WisdomTree SmallCap Dividend Index, which focuses on European small-cap stocks. To understand the components of the fund, it is useful to know what the index is designed to track. The Index is comprised of companies that compose the bottom 25% of the market capitalization of the WisdomTree Europe Dividend Index, after the 300 biggest companies have been removed.

By their very nature, small-cap stocks tend to be more volatile than large-cap stocks. Small public companies generally grow faster and achieve capital appreciation more quickly in the stock market. However, they also can fall much faster when conditions reverse. Since small public companies typically are younger and less established than bigger public companies, funds such as DFE are prone to wider swings than larger-capitalization ETFs.

DFE is nicely diversified among small-cap European stocks, with industrials consisting of its largest holding at 25.73%. Rounding out the fund’s other top five holdings, and their respective percentages, are: consumer discretionary, 19.85%; financials, 15.58%; information technology, 11.49%; and materials; 7.61%. As far as country allocation, DFE’s largest concentrations and weightings, are in the United Kingdom, 24.66; Italy, 14.38%; Germany, 10.44%; Sweden, 9.50%; and France, 6.92%.

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None of the fund’s top holdings individually account for even 2% of the portfolio. The five biggest holdings are: Cable & Wireless Communication, 1.92%; Nexity, 1.74%; Sonae, 1.40%; Antena 3 de Television SA, 1.29%; and Banca Generali SpA, 1.24%.  You may not know those companies but don’t worry about it. Since the companies are smaller and less established than large-cap stocks, it is not unexpected that you may be unfamiliar with them.

Even though Europe has been hammered economically and much of the region is stuck in a recession, opportunity still exists there. As the performance from the chart above indicates, sometimes good things really do come in small packages.

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please check out my Successful Investing newsletter. As always, I am happy to answer your questions about ETFs, so do not hesitate to email me by clicking here. You may see your question answered in a future ETF Talk.

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