Buying: Starting a Small-Cap Position in my Dividend Portfolio
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Over the past couple of weeks I have been investigating whether small-cap stocks have a place in my dividend portfolio and how I should actually get small-cap exposure into my dividend portfolio. My conclusions from these two articles were as follows:
1. Small-cap stocks do have a place in my portfolio as they have had good returns historically. In addition, much of a portfolio’s return is based on asset allocation as opposed to individual stock picks so exposure to different asset classes is influential on potential returns.
2. I do not have the time nor the inclination to research and track the 25 individual small-cap stocks that are needed to ensure effective diversification. Small-caps are volatile and add extra risk to a portfolio, so diversification is key. I determined that the best bet was an index fund as they are cheaper than actively managed mutual funds.
This takes me to the point I am at now – the actual index fund I have chosen to include in my portfolio. My pick is the iShares S&P SmallCap 600 Index Fund (IJR). Here are some details about this fund:
Objectives:
The iShares S&P SmallCap 600 Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of U.S. small-cap stocks, as represented by the Standard & Poor’s SmallCap 600 Index.
Expense Ratio
Nice and low at 0.20%
Dividend Yield:
Not huge, but the index fund does have a 0.70% yield
Returns:
The first line of the table is the fund return and the second is the index return. As you can see, the fund has tracked closely to the index returns, minus the expense ratio. This is encouraging as my objective is to meet the market returns of a small-cap index. I realize that I need to pay some fee, but I would rather pay 0.20% and meet the market than pay 3.45% and not even come close!
To be totally honest, I did not have a lot of choice when it came to which fund I would use. The broker I use, CSA, has a limited selection of index funds and this was the one small-cap fund they offered. What I do get is the ability to reinvest my dividends from the fund into fractional shares. This is something I am comfortable with as the reinvestment into fractional shares has proven to be a huge benefit.
I will be placing a trade shortly to begin my small-cap exposure in my dividend portfolio. Once it is exercised I will let you know.
8 Comments on this post
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telly said:
Good choice! I actually own the Vanguard small-cap index in my 401k (I am a Canadian resident though). I’m amazed at how low the MERs are for US mutual funds and ETFs. Also, it seems as though dividend reinvestment (if you choose to) of fractional shares is standard procedure amongst US brokerages whereas only CSA or DRIPs offer this in Canada.
October 17th, 2007 at 7:43 am
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