There’s Value in Small-Cap Value | ETF Trends

The 2024 struggles of small-cap stocks and related ETFs are well-documented. But something that’s arguably overlooked is strength in value stocks. For example, the Russell 1000 Value Index is higher by 4.6% year to date.

While that lags the returns of broader benchmarks, it can be viewed as a sign that value stocks might be turning a corner. It remains to be seen if that scenario will be applicable to small-caps. But if that proves to be the case, the ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM) is among the ETFs that could reward investors.

Home to nearly $581 million in assets under management, OUSM follows the O’Shares U.S. Small-Cap Quality Dividend Index (OUSMX). To the ETF’s credit, it has outperformed the Russell 2000 and the Russell 2000 Value indexes on a YTD basis. It has generated positive returns while those two benchmarks are in the red.

OUSM Could Be Relevant Now

OUSM isn’t a dedicated value fund. As its name implies, its points of emphasis are dividends and quality. Add low volatility to that mix, too. However, those factors, particularly when combined in a single wrapper, often lend themselves to value. That’s potentially attractive at a time when it’s clear the value proposition offered by vale stocks is enhanced. The same is true of small-caps.

“The large gains of many mega-cap stocks over the past year have led to the large-growth and large-blend sections of the Morningstar Style Box being overvalued. On the other hand, opportunities remain in small-cap and value stocks as they remain undervalued,” noted Morningstar analyst Zachary Evens.

Another advantage offered by OUSM is the potential to reduce some of the volatility associated with small-caps. Historical data indicates that ETFs focusing on either small-cap dividend payers or smaller value stocks typically sport lower annualized volatility than traditional blended small-cap indexes.

Economy’s Current Strength

Further cementing the bull thesis for OUSM is strength in the economy. Due to their domestic-heavy revenue streams, small-caps are more economically sensitive than larger peers. Current consensus indicates the U.S. economy is unlikely to enter a recession anytime. That could be good news for OUSM, which allocates 22.45% of its roster to consumer discretionary names.

“We expect US gross domestic product growth to slow over the next year, owing to delayed effects of monetary tightening along with the depletion of household excess savings,” concluded Evens. “The alleviation of supply constraints along with cooling demand is pushing inflation down, and we expect inflation to be in line with the Fed’s 2% target in 2024 and following years. This will allow the Fed to begin cutting rates aggressively, triggering a GDP growth rebound in 2026 and beyond.”

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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.