Small-cap stocks and the related exchange traded funds have recently been earning increased attention thanks to resurgent performances. Some of that has to do with small-caps’ reputation for being solid performers as interest rates rise.
One small-cap dividend ETF is getting a refreshed look, which could potentially reduce its vulnerability to rising interest rates. The O’Shares FTSE Russell Small Cap Quality Dividend ETF (NYSEARCA:OUSM) has a new index.
“Global index provider FTSE Russell recently made some adjustments to the FTSE USA Small Cap 2Qual/Vol/Yield 3% Capped Factor Index, which underlies the O’Shares FTSE Russell US Small Cap Quality Dividend ETF, to help O’Shares address investor concerns around rising interest rates and slowing growth,” said FTSE Russell.
OUSM’s New Look
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 $127.61 million OUSM allocates almost 34% of its weight to industrial stocks while the financial services and consumer discretionary sectors combine for 34.70% of the ETF’s weight.
The result of OUSM index change “is the new FTSE USA Small Cap ex Real Estate 2Qual/Vol/Yield 3% Capped Factor Index—it excludes real estate investment trusts (REITs), which had been a 21% allocation,” said FTSE Russell. “This change removes REITs and reduces the number of constituent holdings from 310 to 224, increasing the weight of other growth industries in the index such as Health Care, Financials and Technology.”
REITs are historically inversely correlated to rising Treasury yields, indicating OUSM could benefit from reduced exposure to the asset class as borrowing costs increase.
“Speaking with our investors and observing the direction of US equity markets, we became concerned about the impact of REITs in the O’Shares FTSE Russell US Small Cap Quality Dividend ETF,” said O’Shares founder Kevin O’Leary. “A combination of rising interest rates and slowing economic growth has impacted this area and we thought the ETF could benefit from an underlying index that was free of this asset class and more diversified in other sectors.”
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