In the face of a 2016 that has, in many ways, involved a 180-degree turnaround from what worked well in markets during 2015, there has been no shortage of surprises. For instance, few have expected amidst significant global uncertainties that a strategy focused on small caps, the WisdomTree Global SmallCap Dividend Index
, would dramatically outperform the MSCI ACWI Index
, a strategy focused on large caps.
Frequently, small caps are characterized as doing well in global economic acceleration, whereas large caps are thought of as more defensively oriented, well-established companies.
Global Small-Cap Dividend Payers Outperform in 2016
The real question, of course, is how this happened, with a secondary issue focusing on the potential robustness of those drivers looking into the future.
Understanding the Outperformance: Top Five Sector & Top Five Country Contributors
• In the U.S., 2016 Has Been the Year of Dividend Payers:
2016 started with significant uncertainty, whether looking at the price of oil, China or even the political landscape in the United States. WisdomTree, for a period nearing 10 years, has been saying that in times of uncertainty it behooves investors to think about dividend-paying stocks. That has been true in the United States, even more so given the fact that the U.S. 10-Year Treasury note interest rate
has gone from about 2.30% to 1.83%,1
as investors need to replace income that couldn’t be gotten in fixed income. When we focus on smaller market capitalization
dividend payers in the U.S., one consequence is that exposure to real estate tends to increase, and it follows that financials are also a major contributor of the WisdomTree Global SmallCap Dividend Index’s outperformance against the MSCI ACWI Index.
• Canada, Norway and Australia Have Rallied:
These commodity-sensitive markets all tend toward relatively high dividend yields
, which leads to over-weight positioning in the WisdomTree Global SmallCap Dividend Index versus the MSCI ACWI Index. Combine this with the fact that commodity countries have rallied and those countries’ currencies have also rallied against the U.S. dollar, and you begin to see how these over-weights have helped relative performance.
• A Stronger Yen Is a Challenge for Japan’s Exporters:
Even though Japan, which hasn’t been a strong equity market thus far in 2016, is a relative over-weight in the WisdomTree Global SmallCap Dividend Index compared to the MSCI ACWI Index, Japan’s small caps are more insulated from the impact of the yen’s strength—which sees profits of global multinationals in Japan face challenges. We believe going small rather than large on the capitalization spectrum has helped here.
• Materials Deliver over 14% Returns Thus Far in 2016:
Continuing along the lines of the rally in commodity prices, the Materials sector—twice the weight in the WisdomTree Global SmallCap Dividend Index as in the MSCI ACWI Index—has delivered better than 14.0% total returns thus far in 2016. It is interesting to see this type of return, given how sentiment has been very focused on volatility
and uncertainty in 2016.
Bottom Line: Don’t Forget about Global Small Caps
We believe the global small-cap dividend payers’ outperformance thus far in 2016 signals that investors should not forget about small caps; global small caps with a dividend focus are currently delivering strongly in a tough equity environment—and are behaving much different from what we’ve seen in global large caps.
Source: Bloomberg, from 12/31/15 to 5/23/16.