In the world of investment, exchange-traded funds (ETFs) have gained immense popularity as a convenient way to diversify one’s portfolio. Among these, the WisdomTree U.S. SmallCap Quality Dividend Growth Fund ETF (DGRS) stands out for its focus on dividend stocks with net profit growth prospects supported by efficient capital use. While it may seem like an attractive option for income-focused investors, a closer examination reveals some important insights.
DGRS Portfolio Composition
DGRS primarily comprises mid-cap dividend stocks. The fund’s investment mandate is to track the WisdomTree U.S. SmallCap Quality Dividend Growth Index, which represents the performance of small-size dividend-paying companies demonstrating notable capital efficiency and potential earnings growth. These companies must meet specific growth and quality criteria, such as long-term earnings growth expectations and historical averages for return on equity and return on assets.
As of November 3, DGRS had a portfolio of 282 stocks, with a weighted-average market capitalization of approximately $2.28 billion. Notably, the fund’s holdings are primarily mid-cap companies. This aspect is important to consider, as mid-cap stocks can introduce a different level of risk and volatility compared to their larger counterparts.
Valuation and Quality Metrics
When evaluating DGRS, one of the key metrics to consider is valuation. Exposure to stocks with strong value characteristics (B- Valuation grade or higher) is comparatively large, which is expected for a fundamentally weighted small/mid-cap mix.
However, it’s essential to understand that DGRS may not provide significant growth exposure. Around 41% of the net assets are allocated to companies that are forecast to deliver smaller earnings per share (EPS) going forward. Given its focus on earnings growth, this may raise concerns for investors looking for robust growth potential.
Moreover, DGRS offers a weighted-average forward EPS growth rate of 5.9%, which may disappoint investors seeking companies with strong growth prospects. The fund’s revenue growth rate also provides little solace.
Dividend Characteristics
One of the primary attractions of DGRS is its dividend focus. Currently, the fund offers an almost 3% weighted-average dividend yield. However, it’s crucial to examine the components of this dividend yield. Some of the top contributors to the yield have had varying performances throughout the year, with some posting negative returns. This highlights the importance of considering both the yield and the underlying performance of the stocks contributing to that yield.
Performance and Total Returns
Investors should assess an ETF not just for its income potential but also for its ability to generate steady total returns. In this regard, DGRS may leave some investors wanting more. When compared to other ETFs like the iShares Core S&P 500 ETF (IVV) and iShares Core S&P Small-Cap ETF (IJR), DGRS has not delivered impressive total returns. It has even underperformed the S&P 500, which may disappoint those looking for more substantial growth.
Final Thoughts
While DGRS may seem like an appealing choice for dividend-focused investors, it’s essential to weigh the trade-offs carefully. The fund’s focus on mid-cap stocks and the lack of significant growth exposure may not align with the goals of all investors. Additionally, the fund’s performance, especially in terms of total returns, may leave some wanting more.
Investors should recognize that deploying dividend growth strategies in the small/mid-cap universe differs from using the same approaches in larger-cap markets. While these strategies may offer dividend growth, they can introduce increased risk and volatility. Therefore, the decision to invest in DGRS should be made after careful consideration of individual financial goals and risk tolerance.