With small caps poised to enter 2025 with rate cut-driven momentum, it could be worth adding a small cap ETF. The ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM ) may be the route to watch there. Its quality dividend focus has helped it identify some notable opportunities, with a number of its stocks set to intrigue. Three names in particular can evince the fund’s draw as rate cuts look set to juice small cap investing.
See more: This Small-Cap ETF May Be the Standout Rate Cut Play
Why look to small caps as rate cuts continue to build? Larger firms already dominate many investors’ portfolios, with concentration risk an underrated issue. Especially given how much tech dominates therein, getting diversification into smaller names can spread that risk out. On a more positive note, rate cuts can help small caps deal with high debt costs. For many important small cap segments, borrowing costs can add significant pressure and limit their upward mobility.
Small Cap ETF OUSM
OUSM, which charges 48 basis points (bps), offers exposure therein. The small cap ETF tracks the O’Shares US Small-Cap Quality Dividend Index, emphasizing firms meeting quality and dividend screening thresholds. The strategy sets limits on sector and individual firm exposures to limit overweights to traditional dividend heavyweight segments. So, what kind of firms can investors find in the small cap ETF?
Texas Roadhouse, Inc. (TXRH)
Starting off, the restaurant chain TXRH has shown that it can appeal in consumer discretionary. TXRH has returned 60.2% YTD per YCharts data, outperforming the S&P 500. It has produced 32.6% quarterly year-over-year diluted earnings-per-share (EPS) growth, too. The restaurant chain, intriguingly, could benefit from easing interest costs for its own business and for consumers who may go out to dinner more. Its 30.29 forward price-to-earnings (PE) ratio appeals, too.
Houlihan Lokey, Inc. (HLI)
The investment bank HLI focuses on mergers and acquisitions as well as capital markets and financial restructuring. A worldwide firm, it has returned 56.2% YTD per YCharts. The firm has produced a 38.4% quarterly YoY diluted EPS growth metric with a 32.09 forward PE ration. M&A could benefit from rate cuts, itself, as deals benefit from cheaper borrowing costs.
ITT, Inc. (ITT)
The engineering component manufacturer focuses on brake pads, shock absorbers, pumps, valves, and more. Per YCharts, it has outperformed the S&P 500 returning 29.1% YTD. The stock has produced a 46.3% quarterly YoY diluted EPS growth metric. It has also offered a 25.76 forward PE ratio. Its focus on engineering materials with a North American focus could also, of course, benefit from cheaper borrowing for car manufacturers, for example.
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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