Small caps have been out of favor for a not-insignificant period. A rising rate and higher for longer rate environment certainly don’t help, either. Still, signs are appearing that suggest small caps’ moment may be on the horizon. Not only are small caps historically cheap, but they are also poised to offer some intriguing upside if the Fed cuts rates. Together, those factors add to the case for an ETF like OUSM, the ALPS O’Shares US Small-Cap Quality Dividend ETF.
Right now, small caps are notably cheaper than they have been in the past. Not just cheap, but historically cheap, with the small-cap Russell 2000’s forward p/e ratio 20% below its 10-year average. Those smaller firms, which traditionally offer significant upside and fast growth at greater risk to investors, could be an intriguing play entering 2024.
See more: As Small-Cap ETFs Rally, Check Out OUSM
Of course, the primary challenge facing small caps right now is the higher for longer interest rate regime. Small-cap firms’ debt rolling over into higher interest rates takes a big bite out of their potential. That’s why recent projections of one or even multiple rate cuts next year add such appeal to small caps. Getting into the space at a discount, then, could offer some intriguing opportunities.
OUSM provides one potent route into the space. Its strategy involves tracking the O’Shares US Small-Cap Quality Dividend Index, with OUSM assessing the index’s constituents based on quality, volatility, dividend yield, and dividend quality.
That helps the ETF screen out small-cap firms that may be struggling with the aforementioned high rates. At the same time, by considering those factors, it also could identify firms set to benefit significantly from rate cuts next year. Taken together, small caps could present an overall intriguing allocation for those reassessing their portfolios.
For more news, information, and analysis, visit the ETF Building Blocks Channel.