Published:
May 12, 2008
WisdomTree
International SmallCap Dividend (NYSE: DLS, $63.02) is an exchange-traded fund (ETF)
that invests in small-capitalization foreign firms with
significant dividend yields. Over the long-run, smaller firms tend
to outperform large-cap companies. For example, the S&P 600
Small-Cap Index has returned more than double the gain of the large-cap focused S&P 500.
There is no single explanation for that outperformance. However, one key reason is that smaller firms tend to have more room to generate growth. That's because larger capitalization firms have, in many cases, already exploited the bulk of the growth possibilities in their industries.
Meanwhile, portfolios containing a healthy dose of international stocks tend to outperform those invested exclusively in U.S. companies. A study by Vanguard covering the period from 1973 to 2003 shows that European stocks actually offered about a
+1% annualized advantage over U.S. stocks -- returns of approximately +12.5% annually against just +11.5% for the U.S. Meanwhile, emerging markets did even better, offering returns of nearly +15% annualized over the same period.
Although +1-2% annualized gains might seem like a trivial advantage, that's certainly not the case when looked at over a long time period. For example, $100,000 invested for 30 years at +11.5% would grow to about $2,610,000 -- a very respectable sum. However, if you were able to invest that same $100,000 at +12.5% per year, then you'd end up with over $3,400,000 at the end of 30 years -- an improvement of almost one million dollars.
And more recently, international stocks have outperformed even more significantly thanks to strong growth in emerging markets such as China and India. Consider that
over the past five years Hong Kong's Hang Seng Index is up three
times more than the S&P 500.
DLS sits at the heart of these two key market trends, as the fund
invests in small-cap companies in international markets. The fund is
widely diversified, with its top ten holdings accounting for barely 6% of total assets -- that reduces the overall risk of the portfolio. And DLS is also widely diversified by country with holdings in Europe, Asia and Latin America.
With leverage to fast-growing international markets, DLS looks like
an attractive holding for aggressive dividend-focused investors
willing to weather the occasional volatility inherent with small-cap stocks. Meanwhile, investing overseas is an excellent way to protect your wealth against a weakening U.S. dollar -- a weaker dollar boosts returns from portfolios of foreign stocks.
Paul Tracy
Editor
StreetAuthority
Market Advisor
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Virginia, has appeared as a guest expert on several prominent financial radio
shows, and has been a featured speaker at various investment conferences across
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Paul graduated with a B.S. in Finance and Management from the McIntire School
of Commerce at the University of Virginia.
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