How This Global Small Cap ETF Fits Into a Long-Term Strategy

It's surprisingly easy for investors to let their portfolios get out of balance. Even the great Warren Buffett, when he was CEO of Berkshire Hathaway, allowed the company's stake in Apple to swell to become nearly half of Berkshire Hathaway's entire equity portfolio.

Diversification is one of the keys to investing, but if you're in the U.S., it can be tempting to overload on U.S.-based stocks. And that's particularly true in today's environment, when the S&P 500 is dominated by a handful of tech stocks like Nvidia, Microsoft, and the aforementioned Apple.

Image source: Getty Images.

But there's an easy solution. And as it so happens, the answer lies in a fund that provides exposure to small-cap stocks with an international flavor -- nicely balancing any investment portfolio dominated by the "Magnificent Seven" grouping. And just to sweeten the deal, this fund is outperforming the S&P 500 over the last year by a wide margin.

Meet the DLS ETF

The WisdomTree International SmallCap Dividend Fund (NYSEMKT: DLS) is an ideal exchange-traded fund for this situation. The ETF tracks dividend-paying companies in the WisdomTree International SmallCap Dividend index, which includes small-cap stocks in developed markets outside the U.S. and Canada.

The ETF currently holds just over 1,000 stocks, none of which has a weighting of more than 0.65%. That provides investors with ample diversification, as the top 10 stocks in the ETF account for only 5% of the ETF's total weighting. You won't have any Berkshire Hathaway-Apple issues with this fund. And given the S&P 500's heavy weighting toward tech stocks, the DLS ETF offers investors significant exposure to sectors that could easily be overlooked.

Data source: Morningstar.

How does the DLS ETF perform?

Over the last year, the WisdomTree International SmallCap Dividend Fund has been a big winner for investors. The fund is up 35% in the last year, topping the 13% gain of the S&P 500.

But remember this is a dividend ETF. And with a yield of 3.7%, the DLS ETF gives you even more opportunities to grow your portfolio. Including the dividend into the fund's total return over the last year, DLS provided a 41% return over the last 12 months versus 14.3% for the S&P 500.

^SPX data by YCharts

Why the DLS ETF works

Even if you're investing in an index fund like the S&P 500, you can have holes in your portfolio. The S&P 500 focuses on large companies, is heavily weighted toward the U.S., and is overweighted to major tech stocks.

The WisdomTree International SmallCap Dividend Fund ETF helps fill those holes with small-cap stocks outside North America and avoids overreliance on tech stocks. And on top of that, it pays a great dividend. With its international flair and exposure to small-cap stocks, the DLS ETF can be an important part of a long-term investment strategy.

Patrick Sanders has positions in Nvidia. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.