What is DLS? (Pros, Cons, and Strategies)
As globalization deepens, diversifying investments beyond domestic boundaries becomes increasingly important. One exceptional option for international diversification is DLS, the WisdomTree International SmallCap Dividend Fund. This fund offers investors exposure to small-cap companies across developed international markets, promising a mix of growth potential and steady income through dividends. Today, we'll delve into what DLS is, along with its advantages, disadvantages, and strategic approaches to investing in it.
What is DLS?
DLS is an exchange-traded fund (ETF) that focuses on small-cap companies outside the United States, primarily in developed markets. DLS stands for WisdomTree International SmallCap Dividend Fund.
DLS tracks the WisdomTree International SmallCap Dividend Index, which invests in small-cap companies that pay regular dividends, offering investors a mix of value and growth through both income and potential capital appreciation.
Key Features of DLS
- Companies located in developed markets outside the U.S.
- Companies that regularly pay dividends
- Focus on small-cap companies with greater growth potential compared to their larger counterparts
The index selects high-quality small-cap companies based on several fundamentals, such as dividend yield, financial stability, and growth potential, making DLS an appealing option for diversification and income.
DLS Composition
DLS includes a wide array of small-cap companies spread across markets in Europe, Asia, and other developed regions. The fund has comprehensive sector diversification, with notable weightings in industrials, consumer discretionary, and financials sectors. This rich mix of sectors and companies makes DLS a well-rounded investment option.
Pros of DLS
International Diversification
One of the primary benefits of DLS is its global exposure. By investing in small-cap companies across various developed markets, DLS allows investors to reduce their dependency on the U.S. economy. This diversification can enhance portfolio stability and growth potential by exploiting economic cycles in different regions.
High Dividend Yield
DLS generally offers a higher dividend yield compared to other small-cap ETFs. This higher yield is attractive for income-focused investors seeking regular payouts while capitalizing on the growth potential of small-cap stocks.
Potential for Capital Appreciation
Small-cap companies often have greater growth potential than their larger counterparts. Investing in small-cap international stocks can yield significant capital appreciation as these companies expand and capture market share in their respective regions.
Cons of DLS
Higher Volatility
Small-cap stocks are generally more volatile than large-cap stocks, and this risk is amplified with international exposure. Economic, political, and currency fluctuations in various countries can create added complexities, making DLS more volatile than domestic-focused ETFs.
Higher Expense Ratio
Compared to some other ETFs, DLS has a relatively higher expense ratio. While the exact expense ratio can vary, it's typically around 0.58%. This higher fee can eat into the net returns, especially for long-term investors.
Limited Exposure to Emerging Markets
While DLS offers international diversification, it focuses on developed markets and does not include emerging markets. Investors looking for exposure to high-growth economies in regions like Latin America or Africa may need to complement DLS with other investment options.
DLS Investment Strategies
Investing in DLS can be suitable for investors looking for both growth and income, especially those aiming for international diversification. Below are some strategies to get the most out of your investment in DLS.
Long-term Investment Strategy
DLS is ideal for long-term investors due to its volatility and growth potential. The small-cap focus means that these companies often take years to realize their full growth potential. A long-term horizon allows investors to weather market fluctuations and benefit from the compound effects of dividend reinvestment.
Regular Investment and Reinvestment
Regularly investing a fixed amount in DLS and reinvesting the dividends can help to maximize the compound effect. This strategy is particularly beneficial for long-term investors planning for retirement or other long-term financial goals.
Complement with Other ETFs
To address the drawbacks of volatility and limited emerging market exposure, consider complementing DLS with other ETFs. Combining DLS with larger-cap, less volatile funds or those focusing on emerging markets can balance risk and offer a more comprehensive international investment strategy.
Monitoring Economic Indicators
Given its international exposure, DLS investors should keep an eye on global economic indicators and trends. Factors like currency exchange rates, geopolitical stability, and international trade policies can significantly impact the performance of international small-cap stocks.
Conclusion
DLS stands out as a robust option for international diversification with the added benefit of regular dividend income. While it comes with its own set of risks and a higher expense ratio, its potential for high yields and capital appreciation make it a valuable asset in a well-rounded investment portfolio. By focusing on long-term strategies and understanding its pros and cons, investors can effectively incorporate DLS into their investment plans for both growth and income.