Following a less-than-stellar start to the year, small-cap stocks and the related exchange traded funds recently perked up. For the 90 days ending Aug. 27, the Russell 2000 Index gained 6.9%. Small-cap value stocks performed even better with the Russell 2000 Value Index jumping 8% over that span.
Investors looking to tap the small-cap value resurgence may want to consider some enhancements, which are offered by the ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM). OUSM has a value feel to it; the ETF’s points of emphasis are reliable dividend growth, quality and low volatility. These are all traits that can mitigate some of the risk associated with small-cap investing.
Importantly, each of those characteristics is useful in the current market environment. Consider OUSM’s quality component. That stands out at a time when the Russell 2000 is littered with unprofitable companies. Speaking of interest rates, dividend stocks often benefit when rates fall, which could happen next month.
OUSM Could Be a Small-Cap Star
Another reason OUSM could be useful to investors is simple: stock-picking is difficult in the small-cap arena.
“Buying individual stocks comes with additional risks. If you own one stock (or even as many as 20 different stocks), you’ll be subject to stock-specific risk—meaning that the odds of things going poorly are much higher than they would be with a diversified portfolio,” noted Morningstar’s Amy Arnott. “In 2023, for example, more than half of all US small-cap stocks lost 10% or more, even though the overall market gained about 26% for the year.”
Diminishing expectation that the U.S. economy is heading toward a recession could also support the case for small-cap ETFs. Specific to OUSM, it’s methodology could offer some protection relative to basic small-cap ETFs if the U.S. economy falters.
“Small-cap stocks are often perceived as more economically sensitive than stocks issued by larger firms. Their business lines are often more focused on domestic markets and can be heavily dependent on trends in interest rates, consumer demand, and commodities prices. In addition, they often carry more debt than larger, more established companies,” added Arnott.
With nearly two-thirds of its roster allocated to financial services, industrial and consumer discretionary equities, OUSM offers investors some potentially leverage to monetary easing by the Federal Reserve.
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