What is SMDV? (Pros, Cons, and Strategies)

In an increasingly volatile market, investors are constantly on the lookout for reliable and consistent investment options. One such option is the ProShares Russell 2000 Dividend Growers ETF (SMDV). This ETF focuses on smaller-cap companies that have a history of growing their dividends. In this blog post, we'll explore what SMDV is, its pros and cons, and the strategies you can employ to make the most of your investment.

What is SMDV?

SMDV stands for the ProShares Russell 2000 Dividend Growers ETF. As its name suggests, this ETF tracks the performance of the Russell 2000 Dividend Growth Index, which includes companies within the Russell 2000 index that have increased their annual dividends for at least 10 consecutive years.

Key Features of SMDV

• Dividend Growth: Only includes companies within the Russell 2000 that have increased their dividends for at least 10 consecutive years.
• Market Cap: Focuses on smaller-cap companies, usually less than $10 billion.
• Liquidity and Volume: Contains companies with sufficient trading volumes to ensure liquidity.

By selecting companies that consistently grow their dividends, SMDV aims to provide a balanced exposure to smaller-cap firms while ensuring income stability.

SMDV Composition

SMDV consists of a diversified selection of smaller-cap companies that have a strong track record of dividend growth. Unlike ETFs that focus on larger companies, SMDV targets firms that might offer higher growth potential but with a consistent dividend history to mitigate risks.

Pros of SMDV

Consistent Dividend Growth

One of the major advantages of SMDV is its focus on companies that consistently grow their dividends. This ensures a steady increase in dividend income over time, making it an attractive option for long-term investors who seek stable income growth.

Exposure to Smaller-Cap Companies

Smaller-cap companies often have higher growth potential compared to their larger counterparts. By focusing on smaller-cap firms that are financially stable enough to increase their dividends, SMDV provides a unique blend of growth potential and income stability.

Diversification

SMDV offers broad exposure to various sectors within the smaller-cap space, reducing the risk associated with investing in a single company or sector. This diversification adds an extra layer of security to your investment.

Low Expense Ratio

With an expense ratio of around 0.40%, SMDV is relatively inexpensive to hold compared to other specialized ETFs. Lower expense ratios are crucial for long-term investors as they help in reducing overall investment costs.

Cons of SMDV

Lower Dividend Yield

While SMDV focuses on dividend growth, the actual yield is relatively modest, usually ranging between 2.5% and 3.0%. Investors seeking higher immediate returns might find this less appealing compared to other high-yield ETFs.

Higher Volatility

Investing in smaller-cap companies inherently comes with higher volatility. While the dividend growth criteria mitigate some risks, SMDV can still experience significant price fluctuations compared to ETFs that focus on larger, more stable companies.

Less Suitable for Short-term Investors

Due to its focus on long-term dividend growth, SMDV is not the ideal choice for short-term investors looking for quick gains. The benefits of SMDV are maximized over a longer time horizon.

SMDV Investment Strategies

Long-term Investment Strategy

SMDV is designed for investors with a long-term investment horizon. A holding period of at least 10 years is recommended to fully benefit from the consistent dividend growth and potential capital appreciation of smaller-cap companies. If your investment timeline is shorter, consider other ETF options that may suit your needs better.

Dividend Reinvestment

One of the best strategies to maximize returns with SMDV is to reinvest dividends. Regularly reinvesting dividends allows you to benefit from the compounding effect, accelerating your asset growth over time. This strategy is particularly effective for retirement savings or other long-term goals.

Dollar-Cost Averaging

By investing a fixed amount in SMDV at regular intervals, you can mitigate the impact of market volatility. This strategy, known as dollar-cost averaging, allows you to buy more shares when prices are low and fewer shares when prices are high, averaging out your purchase cost over time.

Portfolio Diversification

While SMDV offers diversification within smaller-cap companies, it's also essential to maintain a diversified portfolio across different asset classes and sectors. Combining SMDV with other ETFs or investment vehicles can help you achieve a well-rounded investment approach.

Conclusion

SMDV offers a compelling investment opportunity for long-term investors seeking growth and stability. With its focus on smaller-cap companies that consistently grow their dividends, SMDV provides a unique blend of potential and reliability. However, it's essential to weigh the pros and cons and consider your investment strategy to make the most of what SMDV has to offer.

By adopting long-term investment strategies, reinvesting dividends, and maintaining a diversified portfolio, you can effectively leverage SMDV to achieve your financial goals.