European Small Cap Funds Are Rebounding: Time to Get in on the Party? DFE, MTE, VGK

Small cap investors with a stomach for risk who want to bet on a European rebound might want to consider taking a closer look at the WisdomTree Europe SmallCap Dividend Fund ETF (NYSEARCA: DFE) and the Montanaro European Smaller Companies Trust plc (LON: MTE) along with the Vanguard MSCI Europe ETF (NYSEARCA: VGK). However and with that said, a recent article in the Wall Street Journal has noted that Europe-focused stock mutual funds on average lost 15% in 2011 with ETF funds loosing 17% while the Vanguard MSCI Europe ETF (VGK) was down 16% (but its also up around 10% for the year). As for the WisdomTree Europe SmallCap Dividend Fund ETF (DFE), it ended 2011 down about 23% but its also up 14.36% since the start of the year while the Montanaro European Smaller Companies Trust plc (MTE) was down 24% in 2011 and its up 6.67% since the start of 2012. Of course, there have been predictions that Europe will have six quarters of recession starting this year with some European countries already in recession. So should you consider small cap European funds like WisdomTree Europe SmallCap Dividend Fund ETF (DFE) and Montanaro European Smaller Companies Trust plc (MTE) plus the Vanguard MSCI Europe ETF (VGK)?

Starting with the WisdomTree Europe SmallCap Dividend Fund ETF (DFE), it�s a fund that follows the the bottom 25% of the market capitalization of the WisdomTree Europe Dividend Index once the 300 largest companies have been removed. The WisdomTree Europe SmallCap Dividend Fund ETF has about one-third of its assets in small UK companies with the remainder invested in smaller companies in the euro zone. However and investors should note that in the Wall Street Journal article, Jeremy Schwartz, the director of research at WisdomTree Investments, did point out that small caps tend to participate more in the upside and the downside because they are significantly more sensitive to economic cycles. Nevertheless, the WisdomTree Europe SmallCap Dividend Fund ETF has a beta of 1.32 while Vanguard MSCI European ETF�s beta is not much lower at 1.27. On Tuesday, WisdomTree Europe SmallCap Dividend Fund ETF rose 0.54% to $37.34 (DFE has a 52 week trading range of $31.07 to $48.15 a share) for a market cap of $26 million.

Meanwhile, European based small cap investors might want to look at Montanaro European Smaller Companies Trust plc (MTE), a UK based investment company that uses the MSCI Europe SmallCap Index as its benchmark. Specifically, the Montanaro European Smaller Companies Trust plc has about 19% of its portfolio invested in Germany, 17% in Sweden, 10% in France and 10% in Switzerland. In addition, the Montanaro European Smaller Companies Trust plc has just under 50 companies in its portfolio with its top ten holdings accounting for close to one-third of the fund�s holdings. However, investors should note that the Montanaro European Smaller Companies Trust plc comes with a management fee of 1.0% p.a. of the company�s market capitalization along with a performance fee of 15% of the amount by which the increase in the NAV per Share in any accounting period (not exceeding 2% of the company�s NAV). On Tuesday, the Montanaro European Smaller Companies Trust plc rose 0.41% to 368p (MTE has a 52 week trading range of 363.50p to 476.50p a share) for a market cap of 63.16m GBP.

Finally, the Vanguard MSCI European ETF (VGK) attempts to track the MSCI Europe Index (the Index) which primarily includes large and mid-cap companies in developed European equity markets. UK companies account for roughly one-third of the fund�s holdings with France, Germany and Switzerland accounting for another 40% of its holdings plus about a quarter of the fund is invested in its top 10 holdings like Nestle, Royal Dutch Shell and HSBC. In other words, the Vanguard MSCI European ETF (VGK) is not a small cap fund but as with all Vanguard funds, it has a low expense ratio at 0.14%. Moreover, many of VGK�s big holdings are global or exporting MNCs � meaning they should not take as big of a hit in the event of a bad European recession. On Tuesday, the Vanguard MSCI Europe ETF rose 0.93% to $45.62 (VGK has a 52 week trading range of $38.40 to $56.68 a share) for a market cap of $2.63 billion.

The Bottom Line. Investors with a stomach for risk should not completely rule out the WisdomTree Europe SmallCap Dividend Fund ETF (DFE), the Montanaro European Smaller Companies Trust plc (MTE) or the Vanguard MSCI Europe ETF (VGK) as other than investing in European ADRs, these funds might be the easiest way to gain exposure to Europe � for better or for worst.