Small-cap stocks can deliver some of the greatest sensitivity to changes in sentiment across global asset classes. European small caps were a great example of this. When Mario Draghi delivered his “whatever it takes” speech in defense of the euro on July 26, 2012, European small caps delivered a sustained rally that continued pretty much unabated until June 6, 2014.
It’s difficult to find an edge when investing. In many cases, it comes down to a single characteristic that has the potential to mitigate an important risk. To that end, we offer up European small caps. The edge we see? Their dividend yields.
With continued positive economic growth readings in Europe at the end of last year and leading indicators signaling further expansion during 2014, sentiment among investors continues to build positive momentum.
Within Europe, a focus on large-cap stocks results in different sector exposures across countries than does a focus on small-cap stocks. In looking at ways to generate European equity exposure, small caps could offer a potentially differentiated approach and performance experience across different country markets.
One of the nice things about watching the exchange-traded fund (ETF) industry every day is that you get to see how the universe of ETF users reacts to changing market conditions. That collective response usually takes the form of aggregated net inflows into or outflows from defined asset classes, which ETFs track pretty precisely.