Helped in part by the Federal Reserve’s September interest rate cut, small-cap stocks and related ETFs have found solid footing. They’re on the receiving end of closer examination by market participants.
As of late Tuesday, the widely followed Russell 2000 Index sported a YTD gain of 10.38%. That’s certainly solid. But with a little bit of homework, investors could have found options with superior performance. Take the case of the ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM ). It’s beating the Russell 2000 by nearly 400 basis points since the start of the year.
With inflation cooling and taking a backseat to other macroeconomic issues and central banks, including the Fed, paring rates, the stars could be aligning for smaller stocks. For investors who don’t want to stock-pick in a space in which that endeavor is notoriously difficult, OUSM could be a compelling alternative owing to its dividend and quality attributes.
OUSM Has Tailwinds
With just two months left in 2024 and Election Day just days away, now is an ideal time for advisors and investors to examine strategies for 2025. Those strategies include OUSM. Increasingly attractive small-cap fundamentals indicate that could be a good idea.
“We believe the macro backdrop will continue to provide a tailwind to small caps in 2025. Lower historical valuations relative to large-cap peers, solid earnings prospects, and increased dispersion of returns all strengthen the case to add small caps as a diversifier and additional source of returns in a broader portfolio,” noted Goldman Sachs Asset Management (GSAM).
There are other factors on the side of OUSM. In addition to small-caps outperforming large-caps over the summer, there are the historical trends of smaller stocks gaining momentum following the end of a Fed tightening cycle and after presidential elections. Plus, small-caps remains deeply discounted relative to larger peers even when accounting for the summer rally.
OUSM Mitigates Specific Risk
“Breaking out our analysis across regions, a similar story occurs in the US, where the median profitable stock in the Russell 2000 Index continues to trade well below its historical average relative to large caps despite a summer surge of investor interest in the asset class,” added GSAM. “Since 1985, the average discount that the median stock in the Russell 2000 Index has traded at is -2% relative to its counterpart in the S&P 500 index on a P/E basis, excluding unprofitable companies.”
Regarding unprofitable companies, of which there are plenty in the small-cap realm, many traditional small-cap benchmarks are littered with such firms, but OUSM mitigates that risk by placing a premium on quality traits.
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