Eye Small-Cap Dividend ETF OUSM as Inflation Cools

Entering 2023, both rising rates and recession loomed over the U.S. economy. However, inflation took the crown as the principal concern, and rightly so. While inflation remains an issue, a soft landing and a higher-for-longer rate regime stand out as likely trends moving forward. Those combined factors may set the stage for a small-cap dividend ETF like OUSM to perform in the months ahead.

Why small-caps now? In a soft landing environment in which the U.S. economy mostly avoids the worst possible outcomes feared entering this year, small-cap upside can appeal. Investors often want to get in at the sweet spot where smaller firms see significant growth and offer those investors strong returns. What’s more, in a year in which the S&P 500 has relied heavily on just a few firms, avoiding more top-heavy firms that could overheat may also appeal.

See more: “Get Historically Cheap Quality Small-Caps in OUSM

All that said, small-caps have their own risks. Many current small-cap firms will have to refinance into the current, much higher rate regime. With so many built to rely on long-term future revenues, that poses an issue. However, with a small-cap dividend ETF approach, investors can identify the small-caps with a durable outlook. Those firms, then, would find themselves well positioned should the Fed cut rates next year after further inflation cooling.

The Merits of a Small-Cap Dividend ETF

Overall, those factors point to an ETF like OUSM, the ALPS O’Shares US Small-Cap Quality Dividend ETF. OUSM has returned 10.7%, outperforming the ETF database category and FactSet segment averages. The ETF tracks the O’Shares US Small-Cap Quality Dividend Index and has added $141 million in YTD inflows, per LOGICLY.

OUSM takes the S-Network US Equity Mid/Small-Cap 2500 Index and reweights it for quality, low volatility, dividend yield, and dividend quality. It considers factors like ROA and EBITDA, five-year weekly volatility, 12-month trailing dividend yield, and more. Taken together, it holds about 200 firms with a 22% sector cap. Charging 48 basis points, OUSM could be one ETF to watch if a soft landing hits. In such a scenario, a small-cap dividend ETF offers small-cap potential boosted by quality and dividend screens.

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