The ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM) is a compelling offering as it has generated sizable outperformance over competitor small- and mid-cap funds.
OUSM has produced strong returns, outpacing the Russell 2000 and mid-caps, as well as the Vanguard Small Cap Value ETF (VBR). “[OUSM] has been seeing some inflows and I’m not surprised. You lay down performance like that, you will get some looks,” Bloomberg senior ETF analyst Eric Balchunas said during Bloomberg’s “ETF IQ” on Monday.
OUSM takes a conservative approach, looking through a universe of small- and mid-cap stocks and assessing four factors: quality, dividend yield, low volatility, and dividend quality. Notably, while the fund overweights diversified financial services compared to the Russell 2000, OUSM does not hold any banks.
Paul Baiocchi, chief ETF strategist at SS&C ALPS Advisors, said on ETF IQ banks are weeded out by the fund’s methodology, designed to target companies that have higher quality as measured by things like ROA, lower debt, higher dividend growth, lower volatility.
The fund’s strategy has led to its outperformance over peers, according to Baiocchi.
“90 cents of every dollar that goes into small-cap ETFs just goes into basic passive cheap cap-weighted strategies, whether it’s the Russell 2000 or the equivalent, and so in the world that we came out of where interest rates were low for as long as they were, that’s been fine,” Baiocchi said. “But we’re now entering a new reality where interest rates are likely to be higher for longer inflation is stickier at the higher end, and so perhaps a universe where 30% or so of those companies aren’t profitable won’t work the same.”
Launched in 2016, OUSM has accreted $196 million in assets under management. The fund charges a 40 basis point expense ratio, a price that is “pretty good for a smart beta ETF that does a lot of legwork for you,” Balchunas said.
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