Small-cap equities are usually more volatile than their large counterparts. That turbulence can be amplified when smaller stocks aren’t producing impressive returns, as is the case to start 2024.
Most small-cap ETFs aren’t saddled with steep year-to-date losses, as the Russell 2000 Index is lower by just 0.41%. But picky investors have been rewarded for embracing factors such as low volatility and quality. Those are among the traits that provide the foundation for the ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM).
OUSM, which follows the O’Shares U.S. Small-Cap Quality Dividend Index, is higher by 3.19% year to date. That’s good for one of the better performances among small-cap ETFs.
Small-Cap ETF OUSM Matters Now
OUSM’s emphasis on reduced volatility and elevated quality – two factors that are often joined at the hip – is pertinent today. That’s because data suggests there’s recently been an uptick in small-cap turbulence.
“The small-cap benchmark Russell 2000 index RUT — which measures the performance of 2,000 small and midsized companies included in the Russell 3000 RUA index — on Friday booked its seventh straight session with a move of at least 1% in either direction, its longest such run since a 10-session streak that ended in March 2023, according to Dow Jones Market Data,” reported Isabel Wang for MarketWatch.
In addition to its low volatility directive, as its name implies, OUSM is a dividend ETF. Dividends can further enhance a stock’s volatility-reducing prospects. That’s particularly true with dividend growers – the stocks that dot OUSM’s roster.
Inflation Buffer
Dividend growers can provide some buffer against inflation and aren’t as interest-rate-sensitive as are high yield dividend stocks. Speaking of interest rates, Federal Reserve monetary policy figures prominently in the small-cap equation.
“Investors usually see small-cap stocks getting punished when there is market sentiment that interest rates will stay higher for longer, and recovering on signals that the central bank’s monetary-tightening cycle might be over,” according to MarketWatch.
Historically, interest rate cuts have benefited small-caps. Some market observers believe there’s reason to think that won’t be the script again if the Fed pares rates this year. On the other hand, OUSM could prove more resilient than rival funds if the Fed disappoints. Additionally, low rates could relieve some of the stress on smaller banks, which is relevant in discussing OUSM because the ETF allocates 22.18% of its weight to financial services equities.
VettaFi LLC (“VettaFi”) is the index provider for OUSM, for which it receives an index licensing fee. However, OUSM is 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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