Small-caps are projected to deliver significantly stronger earnings growth than large-caps in 2025. One standout option in this space is the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF (OUSM ).
OUSM targets quality small-cap stocks with consistent profitability, low volatility, and strong dividend growth. The aim is to reduce downside risk while capturing potential upside.
The ETF’s methodology screens out cyclical sectors like energy and real estate. This proved beneficial in April as global markets reacted negatively to new tariffs. But OUSM’s focus on high-quality stocks in tech, financials, consumer staples, and healthcare paid off.
Growing Impact of AI
A key driver of OUSM’s growth can be attributed to technological innovation. Particularly in artificial intelligence (AI), which is providing a tailwind for small businesses. While large corporations have been making significant investments in AI, smaller companies stand to gain from the technology’s ability to improve efficiency and reduce costs.
Small businesses across a range of sectors like healthcare and finance are already adopting AI in ways that boost productivity. For instance, small-cap healthcare companies are using AI to streamline patient care with automated note-taking and prescription management. Similarly, smaller financial firms are leveraging AI to enhance their operations and earnings potential.
According to ALPS Monthly ETF Spotlight, top holdings in OUSM such as AI-driven Progress Software and smart metering firm Badger Meter posted strong returns, while defensive sectors like consumer staples and healthcare, represented by holdings like PriceSmart and Encompass Health, led the performance.
Not All Small-Cap Stocks Are Created Equal
Since the beginning of 2025, OUSM has outperformed the Russell 2000 index, a broad small-cap index, which includes many unprofitable companies and tends to experience higher volatility.
According to YCharts, OUSM has returned 3.26% year-over-year and negative 0.97% YTD, outperforming the Shares Russell 2000 ETF (IWM ).
With a favorable rate environment and the growing impact of AI, OUSM offers investors exposure to high-quality, profitable small-cap stocks that may benefit from these trends. However, as with any investment in small-caps, it’s essential to prepare for potential volatility as economic conditions evolve.
For investors looking for selective exposure to small-caps with a focus on quality and resilience, OUSM presents a disciplined alternative in an uncertain market environment.
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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