Many investors are watching closely for rate cuts to arrive this Fall. Those keeping a close watch likely understand that rate cuts may benefit certain areas more than others. Given that rate cuts may benefit small caps, how should investors respond? One particular strategy offers an intriguing take on rate-sensitive small caps that could help it stand out when rate cuts do arrive.
See more: Returns Spiking for This Rate-Sensitive ETF
That factor? Quality. More than even a value screen, quality could help identify really appealing opportunities. Indeed, quality small caps, those smaller firms already showing strong data points in their favor, could just need that rate cut boost to take a big leap forward. Quality rate-sensitive small caps could appeal, then, in an ETF like the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF (OUSM).
OUSM charges 48 basis points (bps) for its approach. The strategy, which launched in 2016, screens for quality by assessing dividends. Its focus on dividends entails weighting its index based on factors like dividend yield and dividend growth and payouts. Its S-Network U.S. Equity Mid/Small-Cap 2500 Index also assesses quality based on metrics like return on assets (ROA).
The ETF can point to strong long and short-term performance, too. OUSM has returned 9% since inception, comparing well to the Morningstar U.S. Small-Cap Broad Value Extended Index, which returned 6.3%. Per YCharts, OUSM has outperformed the S&P 500 Total Return Index (SPXTR) over the last month ending July 23rd, too.
Moving forward, such a strategy could be set to benefit more than a standard ETF focusing on rate-sensitive small caps. For those investors looking to make an adjustment entering a potentially long cycle of rate cuts, OUSM’s quality screen might appeal.
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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