On this episode of the “ETF of the Week” podcast, VettaFi’s Head of Research Todd Rosenbluth discussed the ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM) with Chuck Jaffe of “Money Life.” The pair talked about several topics regarding the fund to give investors a deeper understanding of the ETF overall.
Chuck Jaffe: One fund … on point for today … the expert to talk about it. Welcome to the ETF of the Week. Yes, this is the ETF of the Week, where we get the latest take from Todd Rosenbluth, the head of research at VettaFi. And if you go to VettaFi.com, you will find all the tools you need to be a savvier, smarter investor in ETFs, and to get more details on the new, newsworthy, trending, and timely ETFs that we talk about here. Todd Rosenbluth, it’s great to chat with you again.
Todd Rosenbluth: It’s great to be with you, Chuck.
Chuck Jaffe: Your ETF of the Week is…
Todd Rosenbluth: The ALPS O’Shares US Small Cap Quality Dividend ETF (OUSM).
Chuck Jaffe: OUSM. The ALPS O’Shares US Small Cap Quality Dividend ETF. It’s a mouthful, but there’s got to be a couple of reasons, because there’s a couple of factors in there.
Todd Rosenbluth: That’s right. So, the name does a good job of explaining what this ETF is attempting to do. It’s higher-quality, dividend-paying small-cap stocks. Now that often sounds like an oxymoron. People think of small-caps as faster-growing, nonprofitable companies. This ETF, OUSM, basically is not that. It’s higher-quality companies with strong balance sheets, or relatively strong balance sheets.
Companies that have paid a dividend for five-plus years that are smaller. And the time period of this, which maybe we’ll dig into, is appropriate. So we saw a few weeks of run, where small-caps were in favor. Investors were embracing risk-taking in the equity markets, in anticipation of gradual rate cuts. And then on Monday, the market became extremely volatile.
I guess it was Friday of last week, and Monday, where the market sold off. Notably, because of the jobs number and what was happening overseas. We think OUSM combines that. You get small-cap exposure in a less-risky manner, and we can talk about why that makes sense to us.
Chuck Jaffe: Well, let’s talk about why that makes sense to us. Because, unfortunately, small-caps kind of prove the adage that if you can pick up 10% in a week or 10 days, you can lose it in a lot less than that.
Todd Rosenbluth: That’s right. So the good thing is that OUSM made money during that time period. It rose during that time period that small-caps return to favor and then it’s fallen less in this very short period of time of late last week. And on Monday, OUSM was down less than the Russell 2000 or related ETFs. So, if you want small-cap exposure — as many people should — within their diversified portfolio, this is a lower-risk way of getting that exposure.
You’re going to focus on the companies that have staying power, and you’ll participate in some of the gains, and you’ll participate in some of the losses, but not all on both sides of the table.
Chuck Jaffe: One of the things that VettaFi really tries to do is to dig in and see where holdings are, and make sure you’re getting good quality companies and the rest. This is a fund that has a stellar track record, any way you cut it. But if there’s a criticism of this fund, and Morningstar says there is, and we don’t spend much time talking about anybody else’s research. But Morningstar says that the problem here is they’re neutral on the fund because of people. Because of the management style.
So if we know that that’s a criticism that someone else has, how does that fit in to how VettaFi analyzes things? Help people understand why they would see you recommending a fund that somebody else says, hey, it’s good fund, great performance, but the people is an issue?
Todd Rosenbluth: So again, I don’t want to quibble with another firm’s assessment of an ETF. I’m not really sure the role people play in an index ETF. The ETF holds stocks. The asset manager in this case — ALPS — is following the rule book of the index, which happens to be VettaFi. We are — full disclosure — an index provider that is helping to run the index, based on the rules that were created, focusing on strong balance sheets, dividend-paying stocks.
And what we didn’t include in the name was lower volatility, and that sometimes goes hand-in-hand with dividends. This ETF owns companies that you would be quite familiar with, like the New York Times. Juniper Networks is another position in the portfolio. KC General Stores, which is around the country. It isn’t where I am, I believe, in New York.
The holdings are what’s going to drive this ETF going forward, and the environment that we’re in. I’m not sure of the people that Morningstar is questioning. I know the people who are connected to the index. I know the people who work at ALPS. Both good people. I’m not really sure the role people might play in in the assessment of an index-based strategy.
I get it from an active standpoint. I don’t know that I get it from an index standpoint.
Chuck Jaffe: And that’s actually why I was asking the question. Because Morningstar, by the way, says the process here is great. The costs are as good as you’re going to get in terms of what you want for fees, all those other sorts of things. And yet they gave it a neutral rating and they hung it on that one sort of element. But I didn’t dig into it as well. And again, I’m not trying to quibble or say anything else. I’m just saying we know that we’ve got audience members who are going to go, “oh, wait, here’s a name I haven’t heard of. Let me go check it out.”
Now, the other thing that you mentioned here when you started talking about the holdings is that once we get into small-caps, we have a lot less overlap. In this fund, there’s not going to be a big overlap, or when it comes to things like if you’ve got a small cap-index, giving you small-cap exposure.
So, if somebody’s got a small-cap fund already, how many small-cap issues will you let them have, without just turning a small-cap into mid for you? And is this a fund you want to add? Or is this the fund if you have no small-cap that you want this as your small?
Todd Rosenbluth: I think it depends upon what somebody currently holds in getting small-cap exposure. And we talked about small-caps in the past. Given how strong the mega-cap stocks had been in 2023 and 2024, the weighting towards small-caps probably has shrunk over that time period because Nvidia and Alphabet and Microsoft and what have you were dominating the overall portfolio.
So, we think you should have exposure to small-caps. Again, people should determine what’s appropriate from a risk tolerance standpoint. But it should certainly be less than the large-cap exposure that you have in your U.S. sleeve of a portfolio. If you own the Russell 2000, that’s a collection of a good number of unprofitable companies that are in the Russell 2000.
So if you own any of the ETFs that are tied it, this could pair well. This could reduce the risk of your small-cap exposure, and could pair well with the Russell 2000. If you own something that has more of a quality filter tied to the S&P 600, this is going to have a higher-quality tilt.
But you have some of that because the S&P-600-based strategies have a profitability requirement. So it matters what else you own within the portfolio. This is also rebalanced on a quarterly basis. So this is not actively managed. But the companies are reassessed from a volatility standpoint, from a quality and dividend standpoint, on a quarterly basis.
It’s akin to some of the things people would expect with active management. But it isn’t active management. So, long answer: It matters what’s in your portfolio.
Chuck Jaffe: Last question. As we started your answer to this fund and you started explaining it, we were talking about the small-cap rally. And we had the small-cap rally, which people were saying was due. It was the market broadening out. Then we had small-caps give a lot of it back, but that was the market generally reacting to the recession fears.
Do you think, as you make this your ETF of the Week, that once the market sorts out the big issues, the small-cap rally resumes?
Todd Rosenbluth: I do. I think as long as we don’t have a recession, and then it’s an if. And I’m not qualified to say whether we will or we won’t have a recession. But if the Fed is cutting interest rates in a moderately growing environment, economic growing environment, then small-caps can play a very meaningful part of a portfolio.
Small-caps are more U.S. nationalist, where the revenues are driven from the United States, and a strong U.S. economy is a positive. Small-caps, even though we’re going to have a focus on quality, and the less leveraged small-caps tend to have more debt leverage than your large-cap companies. And so, small-caps are more likely to do better heading into the end of the year if we avoid a recession.
And OUSM is a great low risk way of getting exposure, we think.
Chuck Jaffe: It’s OUSM. The ALPS O’Shares US Small Cap Quality Dividend ETF. The ETF of the Week from Todd Rosenbluth, head of research at VettaFi. Todd, talk to you again next week!
Todd Rosenbluth: I’ll see you next week, Chuck.
Chuck Jaffe: The ETF of the Week is a joint production of VettaFi and Money Life with Chuck Jaffe. I’m Chuck Jaffe. I’d love it if you’d learn all about my hour-long, weekday show by going to MoneyLifeShow.com, or by searching wherever you find your favorite podcasts. And if you’re searching for great information on your favorite ETFs, look no further than VettaFi.com, where they have all the tools you need to be a better investor.
They’re on Twitter or X at @Vetta_Fi and Todd Rosenbluth, their head of research, is my guest. Well, he’s there too. He is at @ToddRosenbluth. The ETF of the Week is here for you every Thursday. Follow us on your favorite podcast app. Make sure you don’t miss an episode. And we’ll introduce you to another great ETF again next week.
And until then, happy investing!
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.
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