As investors reposition small-cap exposure for the current environment in 2024, a quality approach is worth consideration.
Small-caps offer significant growth potential; however, they also come with risk. Small-cap companies are inherently more volatile, reacting more dramatically to the overall economy and changes in interest rates than their large-cap peers.
Small-caps still have a constructive outlook for 2024. However, investors should be wary about naively allocating to a cap-weighted ETF in that segment. Instead, allocating to a small-cap quality ETF could enhance risk-adjusted returns.
“Many small-cap companies are unprofitable, adding to the risks of investing in the style,” said Todd Rosenbluth, head of research at VettaFi. “However, ETFs that screen for quality can make small-caps more appealing.”
The ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM) is designed to provide cost-efficient access to a portfolio of small-cap, high-quality, low-volatility, dividend-paying companies in the U.S. The fund’s holdings are selected based on fundamental metrics including quality, low volatility, and dividend growth.
The fund aims to provide strong performance with less risk than a market-cap-weighted approach. Quality dividend growth strategies are designed to reduce risk and exposure to stress events by avoiding lower-quality stocks.
Why Allocate to a Small-Cap Quality ETF in 2024
The current environment could present an attractive entry point for an allocation to a small-cap quality ETF. The asset class is still available at a discount despite recent gains. Small-caps are currently cheap from both a historical perspective and in comparison to large-cap stocks.
OUSM has $453 million in assets under management. The fund has seen $26 million in net flows over a one-month period. It has accreted an impressive $226 million in net flows over the past year.
The small-cap quality ETF charges 48 basis points.
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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.