The Russell 2000 Index is up about 1% over the past month. This is a decent showing. However, investors’ confidence in a rally in small-caps isn’t certain.
Investors have been regaled with the merits of owning smaller stocks. However, the asset class hasn’t delivered performance needed to validate that chatter. Upon closer examination, however, there is a case for small-caps — one rooted in fundamentals — and that could bode well for ETFs such as the ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM).
Like other small-cap ETFs, OUSM hasn’t been a world-beater of late. That lethargy arguably belies opportunity with a fund that leans into the higher quality segment of the small-cap universe. This is pertinent. Companies that aren’t profitable litter many broader small-cap ETFs.
OUSM Could Have Tailwinds
With the magnificent seven lead equities higher in recent weeks, some market participants may be inclined to examine other opportunities for the back half of 2025. Small-caps and OUSM could merit consideration, particularly because the group displayed some resilience in the face of the White House’s tariff gambit.
“The investment case for US small-cap performance was partly based on increased domestic investment following the imposition of tariffs,” noted Daniel Morris of BNP Paribas. “This will happen only over time, but should provide a boost to future profits.”
He acknowledges that enthusiasm for smaller equities could be tested if data indicate consumer confidence is waning. For now, however, consumers may be able to take comfort in positive signs on the inflation front and low unemployment. Those are two factors that could support gains for ETFs such as OUSM.
OUSM’s Additional Utility
Beyond the possibility of improving macroeconomic data, OUSM offers investors utility in the forms of still low earnings multiples and the point that investing in small-caps doesn’t mean investors have to part with large-cap growth exposure.
“Another appealing factor of US small-cap stocks is that it allows investors to tap into US growth without increasing their allocation to mega-cap tech. Valuations also look attractive, particularly given the high P/E ratios discussed above for large-cap US value stocks,” adds Morris.
Home to $890.7 million in assets under management, OUSM follows the O’Shares U.S. Small-Cap Quality Dividend Index. Since inception, the ETF has outpaced the Morningstar US Small-Cap Broad Value Extended Index.
VettaFi LLC (“VettaFi”) is the index provider for OUSM, for which it receives an index licensing fee. However, OUSM are not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of OUSM.
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