Small caps may not have been a popular theme for investors over the last year or two, but their moment may be coming. Small-cap investing tends to do well in the months following the declaration of a recession. With headwinds seemingly rising due to the lagging impact of rate hikes in the U.S. and slowing growth globally, it may be time to eye a small-cap ETF. One strategy that may stand out, the ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM), could play a role in portfolios.
Yes, small-cap firms are likely set to bear a pretty significant amount of pain from rate hikes. However, investors expect some inherent volatility in small-cap indexes to begin with. They are, to be fair, firms that are earlier in their lifespans in most cases than mid-caps and other, larger firms.
The Small-Cap Case Looking Forward
In a bounceback scenario for the economy following a rate hike-induced recession or even after a rate cut in a recessionary environment, however, small caps could boom. The challenge, then, involves finding the “right” small-cap opportunities. That may be where a quality-focused strategy like OUSM can play a role.
See more: “Getting to Know Three Key Stocks in OUSM”
OUSM tracks an index of U.S. small-cap stocks weighted for exposure to high dividend yield and quality on top of overall equality and low volatility factors. Emphasizing dividends particularly can help identify firms with overall healthy outlooks, as firms only tend to offer solid dividends from positions of strength. It considers those factors based on metrics like EBITDA, 12-month trailing yield, and cash dividend growth.
OUSM charges 48 basis points (bps) to track that index. The quality dividend small-cap ETF has returned 18% over the last year and 6.8% YTD, beating bits ETF Database Category and Factset Segment averages over both periods. For those investors interested in small caps’ ability to do well in a downturn and want to lean on the highest quality offerings, keep an eye on OUSM.
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