Investors facing an expensive, top-heavy U.S. stock market may be looking for sources of diversification, and for good reason. The lagging impact of rising rates may be starting to put up roadblocks for markets, while the Fed looks set for even more hikes. With just ten or so firms driving much of the S&P 500’s growth, diversifying may be prudent. As such, investors and advisors may want to consider how the key stocks in OUSM, the ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM), reflect that goal.
Why OUSM? The strategy has returned well over the last few time periods, 7.9% YTD as well as 10.6% over a year and 12% over three years. The strategy tracks the O’Shares US Small-Cap Quality Dividend Index, looking for U.S. small-cap stocks weighted by quality, low volatility, and high dividend quality and yields. Dividends don’t just provide current income, but can also help indicate a firm’s overall health and outlook.
See more: “Q&A With SS&C ALPS Advisors Chief ETF Strategist Paul Baiocchi”
So what can investors expect from the key stocks in OUSM? While the ETF does set a 2% cap for its holdings, some names still stand out as exemplars of its approach. Consider three examples including the likes of Graco, Inc. (GGG), Encompass Health Corporation (EHC), and Vail Resorts (MTN).
Let’s start with Graco, a bit large for a small cap with a $12.8 billion market cap. This Graco is not the children’s product company, but instead a firm focused on equipment specialized for difficult-to-handle materials. The company serves industrial, automotive, and construction industries with valves, pumps, and tools to apply sealants and adhesives.
Headquartered in Minnesota, the firm has returned 13.6% YTD. It has seen 7.77% five year revenue growth and has a 25.3 forward p/e ratio, per YCharts. It looks set to continue benefiting from infrastructure spending, too, while distanced at least somewhat from tech.
Next, let’s take a look at Encompass Health Corporation. EHC offers healthcare services via a network of inpatient rehab hospitals. It derives the vast majority of its revenue from that line of work, though it also does offer specialized treatments. The firm’s hospitals concentrate in Texas and the eastern U.S. Healthcare often appears in portfolios for more of a defensive tilt, but EHC has produced a solid 20.01 forward p/e ratio as well as 11.7% quarterly revenue growth.
Finally, with winter coming, Vail Resorts could appeal. The firm operates ski areas and mountain resorts across mountain, real estate, and lodging segments. The stock has offered 5.8% revenue growth over the last five years with a 27.7 forward p/e ratio. With winter coming, it may be well positioned, returning 6.8% YTD.
Taken together, these key stocks in OUSM may draw fresh looks from investor and advisors looking to diversify. With capped constituents and a focus away from top heavy stocks, OUSM may be worth watching.
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