By Matt Wagner, CFA, Partner, Research

2020 was the year of historical actions.

Recently published IPO and companies with negative profits have largely overtaken the market at large.

Index performance 2020

For the definitions of the indices in the table above, please visit the glossary.

Like interest rate increased and the economy has accelerated its recovery this year, investors have focused more on short-term cash flow in the form of current profits and dividends. The reversal of market leadership to laggards for non-beneficiaries and non-dividend payers has been more pronounced in the more speculative mid and small caps.

Index performance 2021

For the definitions of the indices in the table above, please visit the glossary.

Environment- and Small cap Dividends

the WisdomTree US MidCap Dividend Index was one of the main beneficiaries of this flight to cash flow. Until December 15, the index outperformed the most followed core and mid-cap value indices this year.

Index performance since the start of the year

For the definitions of the indices in the table above, please visit the glossary.

The WisdomTree US MidCap Dividend Index targets a basket mid caps paying dividends, giving more weight to companies paying higher cash dividends. This investment process generally produces less Evaluation multiples and more quality characteristics than market capitalization weighted indices.

The clue is rebalanced on an annual basis each December, with the most recent rebalancing occurring after market close on December 14.

WisdomTree US MidCap Dividend Index — Characteristics

For definitions of terms in the table above, please visit the glossary.

the WisdomTree US SmallCap Dividend Index has a comparable investment process for the small cap universe.

Until December 15, the index significantly outperformed the Russel 2000 and CRSP US Small Cap Indices– two indices that lean towards companies with a larger market capitalization – but the lagged value indices have moved towards higher values beta companies.

Index performance since the start of the year

As 2022 approaches, investors are looking to resolve the key risk of high valuations in equities and fixed income.

By examining the valuations of the WisdomTree US SmallCap Dividend Index, this sector of the market can help investors lower the overall valuations of the portfolio while providing the potential for higher dividend income.

WisdomTree US SmallCap Dividend Index — Characteristics

Sector allocations

Sector allocation changes for the WisdomTree US MidCap Dividend Index during this year’s rebalance were modest. The index added more than 2% to the consumer discretionary allocation and reduced the weighting of the industrials allocation by a similar amount.

WisdomTree US MidCap Dividend Index — Sectors

The WisdomTree US SmallCap Dividend Index added more than 3% to the utilities sector as several companies pulled out of the mid-cap index. Financials, which are capped at 25% in both indices, have seen their weight reduced by more than 2%.

WisdomTree US SmallCap Dividend Index — Sectors

Conclusion

With high valuations of large-cap US stocks, mid- and small-cap stocks look more attractive to long-term investors. And since the Fed is expected to raise interest rates multiple times in 2022, we might see the same in terms of the outperformance of mid-cap and small-cap stocks versus unprofitable stocks that outperformed in 2020.

In this market environment, dividend payers may be poised to earn income and generate long-term outperformance.

For investors looking to exploit this thesis, we highlight the WisdomTree US Mid Cap Dividend Fund (DON) and the WisdomTree U.S. Small Cap Dividend Fund (DES).

The performances are historical and do not guarantee the future results. Actual performance may be lower or higher than stated. Investment returns and the principal value of an investment fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Standardized performances for DON are available here. Standardized performance for DES is available here. Performances of less than one year are cumulative. You cannot invest directly in an index.

WisdomTree shares are bought and sold at market price (not at NAV) and are not individually redeemed by the Fund. Total returns are calculated on the basis of the daily net asset value (NAV) at 4:00 p.m. Market price returns reflect the midpoint of the bid / ask spread at the close of trading on the exchange where the Fund’s shares are listed. Market price returns do not represent the returns you would get if you had traded stocks at other times.

Originally published by WisdomTree on December 20, 2021.

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Significant risks associated with this article

There are risks associated with investing, including possible loss of capital. Funds focusing their investments on certain sectors and / or smaller companies increase their vulnerability to any single economic or regulatory development. This can lead to greater volatility in the price of the shares. Dividends are not guaranteed and a company that currently pays dividends may stop paying dividends at any time. Please read each Fund’s prospectus for specific details regarding the Fund’s risk profile.

Learn more at ETFtrends.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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