In the early stages of 2026, small-cap stocks are one of the most resurgent asset classes. Equities residing in the small-cap value box are making significant leadership contributions.
Small-cap value leadership is benefiting investors of the O’Shares U.S. Small-Cap Quality Dividend ETF (OUSM). Although it’s not a dedicated small value fund, it is up more than 8% year-to-date. Rather than a strict emphasis on low price-to-book or price-to-earnings ratios, OUSA emphasizes quality, low volatility and, of course, dividends.
On their own, each of those factors has some value traits. A combination of the three enhances the value proposition. That’s working to the benefit of OUSM investors this year. Indeed, there could be more upside on the horizon for the ETF.
OUSM Has Tailwinds
Small-cap value stocks are soaring, but OUSM’s cost of admission remains undemanding.
“Despite inching closer to their fair value in recent months, small-value stocks remain the most undervalued part of the style box,” noted Bella Albrecht of Morningstar. “The segment trades at a 10% discount and has spent close to the entirety of the past eight years in undervalued territory. Small-value stocks briefly slipped into overvalued territory in February 2021, but valuations reversed by October and continued to fall, bottoming out at a 35% discount in September 2022.”
That point is particularly important when evaluating OUSM. This ETFs’ holdings should command premium valuations, because dividends aren’t common in the small-cap space. Additionally, many OUSM member firms are profitable at a time when many basic small-cap indexes house scores of money-losing companies.
OUSM could be coming into view for advisors and investors this year. That’s because, as Morningstar noted, small-cap value trailed the broader market for years while large-cap growth led the way. If market breadth widens or investors opt to reduce exposure to growth stocks while remaining invested, small-cap value and ETFs such as OUSM could be logical beneficiaries.
“Small value sits definitionally farthest from large growth, so it’s intuitive that as large growth led the market higher, small value was the most disconnected,” added Albrecht. “As small-cap stocks underperform and valuations fall, they may be reclassified into the value category faster than their fair value estimates can be adjusted.”
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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.
