DON: Higher Exposure To Financial And Real Estate Sectors Make It Vulnerable In 2023

ETF Overview

Some might ponder whether to put money into large-cap, mid-cap or small-cap dividend funds. On this article, we are going to analyze WisdomTree MidCap Dividend ETF (NYSEARCA:DON) to see if it’s a good funding selection among the many three kinds of dividend funds. Because the title of the ETF suggests, DON invests in mid-cap dividend shares in america. The fund has typically carried out higher than its small-cap peer however inferior to its large-cap peer in the long term. Within the close to time period, its larger publicity to monetary and actual property sectors might make it extra weak in an elevated price surroundings. Due to this fact, we expect traders might need to search different large-cap dividend funds as an alternative.

Fund Evaluation

DON underperformed in opposition to its large-cap peer since 2022 and in the long term

Final yr was a horrible yr for equities generally. DON was not with out an exception. As will be seen from the chart under, the fund has misplaced practically 14% of its worth for the reason that starting of 2022. This was higher than its small-cap peer, WisdomTree SmallCap Dividend ETF (DES), however inferior than its large-cap peer, WisdomTree LargeCap Dividend ETF (DLN). This was comprehensible as small-cap shares often do not need sturdy stability sheets than large-cap shares, and in a quickly rising rate of interest surroundings resembling final yr, many small-cap shares are ill-equipped to fight the headwind. In distinction, large-cap shares are typically rather more established. They have an inclination to have stronger stability sheets and extra sturdy enterprise fashions.

This higher efficiency in large-cap funds over mid-cap and small-cap funds can also be evident in the long term. As will be seen from the chart under, DON’s complete return of 134.7% prior to now 10 years was a lot better than its small-cap peer DES’s 91.99%. Nevertheless, DON’s efficiency was inferior than its large-cap peer DLN’s 163.5%. Not solely as a result of large-cap shares have higher stability sheets than their mid-cap and small-cap friends, they have an inclination to have lengthy runways of progress as nicely. As we all know, not all small-cap shares change into large-cap shares. Even when a few of them with good progress potential change into mid-cap shares or large-cap shares, they are going to be faraway from DES’s portfolio as DES solely consists of small-cap dividend shares. Due to this fact, DES don’t reap the good thing about the expansion potential of a few of its small-cap shares in its portfolio over a prolonged interval. The identical additionally applies to mid-cap as not all mid-cap shares can develop change into large-cap shares. Even when they do change into large-cap shares, they are going to be rapidly faraway from their portfolio.

Decrease publicity to expertise sector is one more reason why DON underperformed DLN

Another excuse why DON has not carried out nicely is that it doesn’t have a excessive publicity to sturdy progress sectors resembling expertise sector. Because the pie chart under reveals, expertise sector solely represents 5.88% of DON’s portfolio. In distinction, expertise sector represents over 18% of DLN’s complete portfolio. No surprise DON’s progress is inferior than DLN in the long term.

The fund has larger draw back danger than DLN

Not solely will DON underperform its large-cap peer DLN, the fund is probably going going to have larger danger than DLN. Because the pie chart above reveals, DON has a excessive publicity to financials sector which accounts for 22.4% of the entire portfolio. Actual property sectors additionally account for about 9.5% of the entire portfolio. In distinction, DLN’s publicity to monetary and actual property sectors are solely 12.5% and 4.5% respectively. As we all know, final yr’s aggressive price hike has induced super stress to the monetary system and induced some disaster in a number of regional banks simply the previous month. As well as, actual property sector can also be below heavy strain as the speed have risen quickly and can stay elevated all through 2023. Due to this fact, we expect DON may have larger draw back danger than DLN.

Our base case is a gentle recession in H2 2023

Provided that the Federal Reserve is probably going going to maintain the speed elevated past 2023, we expect a gentle recession will possible be the end result within the second half of this yr. In a recessionary surroundings, DLN will possible outperform because it has decrease publicity to cyclical sectors resembling financials and actual estates than DON. As well as, we noticed that DON has larger draw back danger within the earlier two recessionary environments. As will be seen from the chart under, DON suffered larger losses than DLN within the Nice Recession in 2008/2009 and the 2020 recession.

Investor Takeaway

We don’t assume proudly owning DON is a necessity on this unsure macroeconomic surroundings. As we have now analyzed, DLN seems to be a better option in each the near-term and in the long term. Due to this fact, we expect traders ought to in all probability put money into its large-cap peer DLN as an alternative.

Extra Disclosure: This isn’t monetary recommendation and that every one monetary investments carry dangers. Traders are anticipated to hunt monetary recommendation from professionals earlier than making any funding.