As is par for the course following presidential elections, there’s been ample speculation as to what asset classes and sectors will thrive or languish under the incoming Trump administration. Small-cap stocks and related ETFs are among the most mentioned assets as levered to benefits from the “Trump trade.”
However, some of the blush has worn off that rose. That’s been highlighted by the fact that the Russell 2000 Index shed 5.28% for the week ending November 18. That decline could simply be the result of profit-taking. And it’s worth acknowledging some market observers see efficacy in the small-cap trade — “Trump trade” or not. To be specific, experts believe there’s more upside in store for small-cap value stocks.
That could be to the benefit of ETFs such as the ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM). The fund performed significantly less poorly than the Russell 2000 over the past week. While that’s a short time frame, the ALPS fund could be poised for durability in 2025. And that sturdiness is more a matter of methodology than political dependence.
OUSM Has Trump Trade Leverage, But There’s More
OUSM has a some credibility as a potential beneficiary of a second Trump term, with some that thesis tied to tariff talk.
“Trump’s proposed tariffs are also key to the small-value rally. The goal of slapping tariffs on imported goods is to protect American industry. Businesses in the small-value section of the US equity market tend to be domestically focused. The Morningstar US Small Value Index is shown to earn an estimated 79% of its revenue in the US,” noted Morningstar analyst Dan Lefkovitz.
There are two important points to remember as they pertain to OUSM. First, Trump talked tough on tariffs during the campaign. But those plans could be walked back if it becomes apparent they’re too risky for the U.S. economy. Second, OUSM components are high-quality, particularly relative to the broader small-cap universe. Broadly speaking, these firms are profitable and have business models that reduce dependency on the broader political climate.
“More importantly, history shows that the impact of politics on markets is typically overestimated. In the immediate aftermath of such an all-consuming election, it’s natural that investors can think of little else,” added Lefkovitz. “Time will march on, though. Over the long term, fundamentals like earnings, cash flows, and valuations will drive markets.”
Bottom line: Fundamentals trump politics over the long term, and OUSM has the fundamental methodology to reward patient investors.
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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