The stock market may have started 2024 down, but that doesn’t mean investors have to. Indeed, while the broader market whimpers amid soft China data and still-lingering fear of a slowdown, some areas see major opportunities. Perhaps none is as accessible and intriguing as the attractive discount found in small-cap stocks. The right ETF investing in small caps could, then, make for a solid option for investors looking to start the year off right.
See more: The Case for Mid and Small-Cap Stocks Right Now
Smaller stocks are looking at some of the largest discounts relative to their larger peers since 2010. They’ve trailed some larger firms amid the post-GFC low interest rate regime that birthed some of those megacap tech firms. With U.S. stocks remaining expensive overall in a market shadowed by lingering inflation and a higher for longer rate regime, then, finding the right small caps could boost portfolios.
Quality Small Cap ETF OUSM
That’s where a strategy like the ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM) can play a role. OUSM tracks the O’Shares US Small-Cap Quality Dividend Index, which not only exposes it to dividends that could bounce back this year themselves, but also to smaller firms that meet a quality standard.
That quality view on small cap stocks assesses options based on quality, low volatility, dividend yield, and dividend quality. By screening based on metrics like ROA and EBITDA, while also applying a 2% cap on holdigns and a 22% cap on sectors, it looks to filter out smaller firms that may be suffering due to higher interest rates. Smaller firms tend to feel rate hike pain more acutely, of course, than their larger peers.
That approach helped the small cap ETF end 2023 positively. Looking forward in 2024, it could continue to do well, returning 9% over the last month per VettaFi.
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