If there’s been one standout market narrative in 2023, it’s been the resilience of mega-cap tech and large-cap investing. Investors and advisors went into 2023 looking out for earnings dips, rising rate pain, and overall volatility. That hasn’t exactly panned out as expected, but with large-caps so expensive, it has opened up new opportunities in quality small-caps. With small-cap stocks “historically cheap,” based on forward price-to-earnings ratios, a quality small-cap ETF like OUSM could be a strong option to consider.
The S&P 500 sits far above the small-cap-heavy S&P 600 SML index.
OUSM, the ALPS O’Shares US Small-Cap Quality Dividend ETF, tracks the O’Shares US Small-Cap Quality Dividend Index. The strategy of course provides solid exposure to U.S. small-caps, but the way it does so via its index adds an intriguing spin.
OUSM reweights its index based on exposure to quality, low volatility, dividend yield, and dividend quality. By using metrics like EBITDA, trailing volatility, and volatility and dividend growth, the strategy seeks the 200 small-cap names that fit a “quality” mold. What’s more, it also caps each sector at 22%, limiting an outsized crash or spike in a given area — like, for example, tech.
The Value of a Quality Small-Cap Screen
Looking to a standout buy opportunity in small-caps makes sense, but many small-caps have lower prices for a good reason. Whether they’re struggling on their own terms, or facing macro headwinds, some smaller firms may not have the same upside potential. OUSM’s screening looks for those small-caps that may have the quality to see their prices adjust.
The quality small-cap ETF charges 48 basis points and offers dividends, too, on top of its quality approach. OUSM currently offers a 1.91% dividend yield, returning 9.6% YTD. That’s helped it outperform both its ETF Database category average and its FactSet segment average. OUSM recently crossed the $300 million AUM threshold, adding $50.8 million over the last month in flows.
See more: “OUSM Outperforms Small-, Mid-Cap Competitors”
OUSM also managed to avoid the regional banking names that faced that “mini crisis” earlier this year. In an environment in which overpriced large-caps could fall apart, that only adds to advisors’ considerations. With the gap between small-caps and large-caps showing up in P/E ratio gaps between the two, consider OUSM.
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