Small-Cap Junk Isn’t a Necessity. This ETF Proves It.

Investing in small-cap stocks and some of the related ETFs often requires sacrificing quality for growth potential. Unprofitable companies litter some of the most widely followed small-cap indexes, including those tracked by some ETFs.

Investors wanting small-cap exposure with the added benefit of weeding out financially flimsy companies have some allies in the world of ETFs, including the WisdomTree US Smallcap Quality Dividend Growth Fund (DGRS). The $353.2 million DGRS, which debuted in July 2013, is one of a scant number of small-cap ETFs emphasizing dividends, let alone the quality factor.

It’s a combination that can serve investors over the long-term. As noted in WisdomTree research, while there are certainly periods in which “junk” small-caps outperform, the last six years has brought extended out-performance by dividend-paying smaller companies with legitimate quality traits.

Depend on Small-Cap DGRS

A focus on profitability provides an effective avenue for investors looking to mitigate volatility. That’s not a requirement found in many basic small-cap funds, underscoring the benefits of DGRS’s approach.

“The most widely referenced benchmark for U.S. small-cap equity performance is the Russell 2000 Index. The iShares Russell 2000 ETF (IWM) is designed to track the total return performance, before fees, of this benchmark. As of September 30, 2025, it had roughly 28% of its weight in companies that had negative earnings over the prior 12 months,” noted WisdomTree.

Other Appeals of DGRS

There are other reasons DGRS could be a small-cap ETF star this year. For example, in addition to quality, the ETF offers value. This is notable at a time when so many “junky” small-caps sport unusually high valuations. That’s something to consider. Low multiples and purported discounts relative to large-caps have long been calling cards of small-cap supporters.

However, investors’ tolerance for money-losing companies, regardless of market capitalization, can shift without notice. If that occurs this year, traditional small-cap funds could be left high and dry. Meanwhile, quality offerings like DGRS could thrive. Plus, DGRS could be primed to be a return to prudence or a reversion to the mean play this year.

“The companies investors have typically prized for their prudence, those with steady earnings and consistent dividends, have lagged behind the more speculative corners of the market. Instead, firms with no profits and no payouts have been leading performance charts, marking a striking reversal of the patterns that dominated much of the post-global financial crisis era,” concluded WisdomTree.

This article was prepared as part of WisdomTree’s general paid sponsorship of VettaFi | ETF Trends. This specific content within and any opinions expressed therein belong solely to VettaFi and do not reflect the opinion or analysis of WisdomTree, its employees, or its affiliates. Content published on VettaFi | ETF Trends is provided for educational purposes only and should not be considered investment or tax advice. For investment or tax advice, please consult a financial professional. 

WisdomTree is an independent company, unaffiliated with VettaFi | ETF Trends. WisdomTree has not been involved with the preparation of the content supplied by VettaFi | ETF Trends. It does not guarantee, or assume any responsibility for its content.

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