Investor interest in small caps is spiking following last month’s rate cuts. The possibility of further cuts, too, compounds that growing appeal for smaller firms. Smaller companies tend to benefit more than their larger rivals from dropping debt costs. Especially with larger firms posing some serious concentration risk in the S&P 500, small firms could be poised for a renaissance. For those looking at small-cap ETFs in the medium term to respond to that trend, however, it’s important to keep an eye on one quality fund therein.
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The ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM) stands out for its quality view into small caps. It reweights its S-Network U.S. Equity Mid/Small-Cap 2500 Index for low volatility, dividend yield, and dividend quality. It defines those factors by metrics including ROA, EBITDA, trailing five-year weekly volatility, 12-month trailing dividend yield, and more. It also applies a 2% cap to each single holding and a 22% cap on overall sectors to limit overexposure to traditional dividend powerhouses.
That has helped OUSM return 16% YTD per SS&C ALPS Advisors data, allowing it to outperform the Morningstar U.S. Small-Cap Broad Value Extended Index by almost double. Doing so for a 48 basis point fee, the ETF currently sits at about $770 million in AUM. Over the last six months, it has added more than $150 million in net inflows.
Looking ahead, that quality screen could prove a potent tool in exploring small caps. Small cap firms offering strong dividends may already be healthy enough to do more with rate cuts, past and future. On top of that, its small-cap focus could help diversify investor portfolios facing serious concentration risks. For those looking for small caps with a bit more oomph, OUSM may offer one route in.
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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