Euro Small-Cap ETF Crushing It

March 31, 2014

Europe’s debt crisis is running its course—just look at the red-hot small-cap space.

Europe has been on the mend, and small-caps are massively outperforming their large- and midcap peers.

Still shocking to me is that there’s only one Europe small-cap ETF at the moment, the $1.3 billion WisdomTree Europe SmallCap Dividend ETF (DFE | B-75). That’s likely to change in the near future, but for now, DFE is crushing its large-cap peers in performance, and it remains a solid choice for European small-cap exposure.

In the past year, DFE returned more than 48 percent, compared with a 22 percent return over the same period in the $15 billion Vanguard FTSE Europe ETF (VGK | B-94), which holds large- and midcap companies.

Only a few years ago, investors were running for the exits with market pundits predicting a breakup of the eurozone in one form or another.

But since European Central Bank (ECB) President Mario Draghi’s famous “whatever it takes” speech on July 26, 2012, when he uttered the words: “Believe me, it will be enough,” in reference to the ECB’s stimulus plans to preserve the euro, the European markets took off and never looked back.

Almost two years later, bond yields across the continent are plummeting and stock markets are still rallying.

Two Clear Trends In Europe

Since the day of Draghi’s speech, we’ve seen two clear trends in the European stock market.

One is that small-caps have massively outperformed. The second is that the “eurozone” has outperformed “all Europe.”

DFE 2012-2014

Chart courtesy of

You can see that EMU-focused ETFs like the iShares MSCI EMU ETF (EZU | B-62) and the SPDR Euro Stoxx 50 ETF (FEZ | A-55) are outperforming “all Europe” funds like VGK and the SPDR Stoxx Europe 50 ETF (FEU | A-86).

When selecting Europe ETFs, determining whether you want Europe or eurozone exposure is crucial, since noneuro nations like the U.K, Switzerland, Sweden and Norway make up roughly 50 percent of “developed” Europe’s total market cap.

DFE: Lone Wolf For Now

DFE is interesting not only because it’s the sole small-cap Europe play, but it also selects and weights its holdings by dividends. More importantly, for better or worse, it targets all developed European countries, not just the eurozone.

The common explanation given as to why small-caps are outperforming is that they’re more closely tied to the recovery in the local economies, as opposed to large-caps, many of which tend to be multinational exporters.


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