Small caps haven’t had the easiest time over the last few years but could be positioned for a positive upswing. Small caps are historically cheap right now, with the Russell 2000’s forward p/e ratio 20% or so below its 10-year average. For the right firms or the right index, that presents a solid opening. At the same time, markets could be settling into a more stable narrative ahead of 2024 compared to the same time in 2023.
What appeal is there about small caps in general? The smaller firms can be nimbler and offer the potential for rapid growth if they manage to deliver on their promise. The current environment, however, has posed some challenges as high interest rates take their toll. That could see the strongest small caps rise to the top thanks to solid balance sheets or other quality factors, while perhaps cheaper than historical averages.
See more: Is the Small-Cap Moment Coming? Eye OUSM
Those factors could convince advisors and investors to revisit their small-cap allocations. For those doing so, the ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM ) may be one intriguing option to consider. The strategy has performed well over the last year, returning 8.7% compared to -3.4% for its ETF Database Category average per VettaFi.
OUSM's Small Caps Approach
OUSM, which has jumped above $300 million in AUM in the last month per VettaFi as well, tracks the O’Shares US Small-Cap Quality Dividend Index. The small-caps strategy invests in small-cap stocks weighted for quality, low volatility, high dividend yield, and dividend quality. It considers factors like ROA and EBITA as well as 12-month trailing yield and cash dividend growth. Using those factors to assess dividend health, it aims to weigh small caps based on their overall quality.
Charging 48 basis points (bps), OUSM presents one intriguing option for small-caps investing. With the smaller firms historically cheap, leaning on the strongest among them could be one option to consider in the new year.
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