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High Yield + Volatility = South Pacific Opportunity

Quick! When you think of small-cap international stocks, what do you think of?

If you’re like most investors, what usually comes to mind is growth opportunity, diversification and, of course, extra volatility…

But international small-cap dividends?

You bet. And big dividends, too – in this case, approaching the double digits…

Where in the World…

The truth is, there are a lot of dividends to be had overseas. And there are more than a few ETFs that pay dividends while investing in small-cap stocks, like the Market Vectors Brazil Small Cap ETF (BRF) and the Guggenheim China Small Cap ETF (HAO), for instance.

Unfortunately, these funds don’t have very high yields – just 1.94% and 1.36%, respectively.

An investor can always turn to their bigger-yielding, large-cap brethren. The iShares MSCI Brazil ETF (EWZ) yields 2.79%, for instance, and the iShares China Large Cap (FXI) checks in at 2.69%. But with that, an investor foregoes the advantages of small caps.

So when I uncovered small-cap ETF yields in excess of 8% and 9%, it came as quite a surprise…

Take, for instance, the iShares MSCI Australia Small Cap ETF (EWAS). This fund has a current dividend yield of 8.22%. This, despite the fact that the fund isn’t even specifically dividend focused.

Add to that the iShares MSCI All Country Asia ex-Japan Small-Cap ETF (AXJS), which at 9.19% holds an even higher yield. And, like EWAS, it’s not even designed for high yields.

But, as you know, high yields can be a dangerous trap

Hold Your Dividend Lovin’ Horses

Big payouts can be attractive, and Australia and Asia ex-Japan are fine areas to put some money these days.

But, on the other hand, these funds are young – not even two years old yet. And they haven’t exactly lit the world on fire raising capital.

AXJS had only $5.4 million under management as of June 30, 2013, and EWAS had a paltry $1 million at the same time. Plus, these funds are barely traded, each averaging less than 1,000 shares per day recently.

These are real problems, because low assets and non-existent volume can cause a fund to be closed.

You don’t want to get stuck in a fund that might be shut down.

And even if the fund doesn’t close, with such small volume, you may not find a buyer when you’re ready to sell.

A better option for most investors looking for international small-cap investing with dividends might be the WisdomTree International Small Cap Dividend Fund (DLS).

It’s well diversified, including Australia, Singapore and Hong Kong, and has a more-than-respectable yield of 4.48%. Plus, it’s been around for more than five years, has over $600 million under management and averages nearly 50,000 shares per day.

Its continued longevity is nearly assured, it’s well respected and it fits nicely into a dividend portfolio that needs some small-cap, international, dividend-paying diversification.

Once again, high yields usually come at too high of a price…

Safe investing,

Steve Gunn