Entering 2025, many market watchers were looking for small caps to step up amid significant concentration risk. Just a handful of large-cap tech firms drove a significant portion of market performance, pointing to a potential opportunity in 2025. With interest rates now unlikely to drop, which would’ve boosted small caps significantly, can small caps still boost portfolios? The quality small cap ETF OUSM may still be able to play that role.
See more: Moving Out of Cash, Worried by Volatility? Equal Weight ETF EQL Appeals
The ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM ), tracks the O’Shares US Small-Cap Quality Dividend Index. The quality small cap ETF charges 48 basis points (bps) for its services. In doing so, the strategy U.S. small cap stocks that meet its quality standards.
Specifically, OUSM asses firms based on metrics like low dividend yield, low volatility, and dividend quality. The quality small cap ETF does so by scrutinizing firms for their EBITDA, dividend payout and cash growth, and 12-month dividend yield. Finally, the fund sets weight limits on individual stocks and sectors to prevent an overweight towards dividend-heavy areas.
So far in 2025, that approach has helped 13.39% YTD according to SS&C ALPS Advisors data. That performance has helped the strategy outperform the Morningstar U.S. Small-Cap Broad Value Extended Index in that time.
What kind of firms does the strategy hold, then, and how might that further illustrate the quality small cap ETF’s approach? For example, OUSM includes Genpact Ltd. (G), Texas Roadhouse Inc. (TXRH), and Amdocs Limited (DOX), representing a variety of market sectors. TXRH of course falls into hotels, restaurant, and leisure per YCharts data, with a healthy forward p/e ratio of 23.5.
G, meanwhile, operates in professional services, focusing on areas like procurement, human resources, IT support, and more. The firm also provides a steady forward p/e ratio of 15. DOX, meanwhile, works specifically in IT, providing services to cable and satellite communications firms, entertainment companies, and more. It provides a 12.58 forward p/e ratio according to YCharts.
Given this, the ETF may represent a way to get small cap diversification with a bit more quality, even amid uncertainty this year. For those looking to diversify away from concentration risk, OUSM can help.
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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