Many investors are likely looking to small caps right now, and for good reason. Larger firms remain expensive in the U.S. stock market, with many investors heavily exposed to that category. A slowing economy could benefit from a rate cut spark, but those larger firms might not benefit as much as smaller firms. Not all is rosy in small caps, however, nor are all small caps created equal. Quality matters in small caps, which speaks to the case for a quality small cap ETF like OUSM.
See more: Quality Small Cap ETF OUSM Sees Quarter Billion in One Year Flows
Indeed, small caps offer quite a lot of upside for investors and diversification. That being said, not all small caps are the same. Small cap firms with lots of debt or that have failed to live up to expectations could be a trap for eager investors expecting that rate cut bounce. That’s why a quality view could really make the difference.
An ETF Option for Small Caps
A quality screen for small caps can weed out those troublesome candidates, instead finding firms in better positions. The ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM ) provides one route into doing so. The fund tracks an index of U.S. small caps weighted for factors like quality, high dividend yield, and dividend quality.
The strategy, which charges 48 basis points (bps), relies on dividends to provide key information. Dividends can indicate a firm’s healthy outlook or momentum, and current income can provide a real boost to portfolios. The strategy considers specific factors like 12-month trailing dividend yield while measuring overall quality based on metrics like return on assets (ROA).
That approach has helped the small caps-focused ETF perform. The fund, which limits individual stocks to a 2% cap, has returned 20.3% over one year on a cumulative basis, per SS&C ALPS Advisors. According to YCharts, it has outperformed the MSCI USA Small Cap Index (MSSCAPUSA).
Taken together, the strategy provides a strong option for exposure to small caps. For those who are looking at the space, OUSM may appeal.
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