While market volatility may be on the rise, there are avenues for conservative investors to sticks with small-cap stocks, including the O’Shares FTSE Russell Small Cap Quality Dividend ETF (NYSEARCA: OUSM).
Smaller companies, which focus on U.S. markets, are less exposed to a stronger U.S. dollar as rates rise, which would more negatively affect larger corporations with a global footprint. Additionally, periods of rising rates also coincide with expanding economies, which often benefit smaller companies.
The recent momentum in the U.S. dollar and weak inflation could help strengthen the small-cap segment since these smaller companies are more closely tied to the domestic economy than heir larger multi-national peers. Small-caps are more insulated from the negative effects of a strong USD since most of their revenue come from the domestic economy, whereas larger companies have more overseas exposure, so foreign revenues are smaller when converted back to the strong dollar.
OUSM’s quality approach could prove advantageous to investors in a raucous market environment. OUSM tracks the FTSE USA Small Cap ex Real Estate 2Qual/Vol/Yield 3% Capped Factor Index. That index features quality and low volatility traits “designed to reduce exposure to high dividend equities that have experienced large price declines, as may occur with some dividend investing strategies,” according to O’Shares
Embracing OUSM ETF
Valuing high quality value is particularly important as bull markets enter their waning stages, as some market observers believe the current bull market is doing. In the early stages of bull markets, lower quality companies see their shares soar. However, as the bull matures, investors often exhibit a preference for higher quality fare with more compelling valuations.
OUSM’s exposure to companies with robust return on assets (ROA) could prove meaningful for long-term investors.
“Companies in the Russell 2000 with higher return on assets (ROA) performed better in 10 out of 11 sectors over the past 5 years,” according to O’Shares.
OUSM allocates nearly 42% of its combined weight to the technology and industrial sectors.
“Companies with higher ROA outperformed those with lower ROA by an average annualized return of over 10%,” notes O’Shares.
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