The small-cap ETF space offers plenty of promise ahead of the new year, with rate cuts putting the wind at small-caps’ back to end 2024. With smaller firms often leaning on borrowing to grow, cheaper debt servicing costs may be providing a meaningful boost to their outlook. Rate cuts also offer potentially greater M&A activity, a frequent source of value for smaller firms. Those factors are likely key drivers for investors moving assets into small-caps, with one key small-cap ETF standing out against the Russell 2000.
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That fund, the ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM), has beaten the Russell 2000 Index over the last three years, per YCharts data. It has returned 32.8% in that time as of December 17 compared to the Russell 2000’s 12.1% return in that time. What’s more, OUSM has also beaten the SPDR S&P 500 ETF Trust (SPY) over the last six months, according to YCharts.
Small-cap ETF OUSM has outperformed the Russell 2000 over the last three years, per YCharts.
A Small-Cap ETF Strategy to Watch
How has the small-cap ETF produced those returns, and what role might it play in a small-cap moment in 2025? OUSM, which charges a 48 basis point fee, tracks the O’Shares US Small-Cap Quality Dividend Index. That index weights small-cap stocks for quality, low volatility, dividend yield, and dividend quality. It does so based on metrics including cash dividend growth, trailing five-year weekly volatility, EBITDA, and more.
By looking to dividends within the small-cap space, the strategy can identify firms better prepared to take advantage of rate cuts. Companies offering dividends tend to have healthy outlooks. What’s more, with its additional quality screen, OUSM can identify firms that aren’t just flattering to deceive with those dividends, either. Together, the small-cap ETF has outdone many rivals in its space, and could be poised to ride a rate cut wave for small caps next year.
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