With large-cap growth stocks garnering most of the attention, it’s not surprising that many investors are overlooking opportunities in the small-cap value space. Interestingly, for the year ending June 26, the Russell 2000 Value Index modestly outpace the broader Russell 2000.
However, that trend isn’t uniform across the small-cap landscape. For example, over the same period, the S&P SmallCap 600 Index easily outperformed its value offshoot. That could leave investors confused to the point that they eschew small-cap value outright. But with a little bit of homework, they can find credible ideas for this factor combination. Enter the ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM).
Over the past year, OUSM is higher by nearly 15%, well ahead of an average gain of 9.2% for the Russell 2000 Value and S&P SmallCap Value indexes. Of course, it’s worth understanding why OUSM has beaten those benchmarks. One of the reasons is exclusivity.
OUSM’s High Bar to Entry Helps
The largest ETFs that follow the Russell 2000 Value and S&P SmallCap Value indexes hold 1,409 and 486 stocks, respectively. In other words, those benchmarks take essentially all of the stocks from the parent gauges that display value traits, and the related ETFs reflect as much.
That’s not necessarily a bad thing, but OUSM is a much more exclusive club. The ETF holds just 105 stocks. But investors shouldn’t fret about concentration, as just five OUSM components command weights of 2% or more, and the largest is just 2.05%. To investors who are accustomed to broad-based benchmarks such as the aforementioned small-cap value gauges, OUSM may appear daunting. On the other hand, instances of diversification are not always delivering for market participants.
OUSM: Small-Cap ‘Country Club’
“Diversification is protection against ignorance. It makes little sense if you know what you are doing. A lot of great fortunes in the world have been made by owning a single wonderful business. If you understand the business, you don’t need to own very many of them,” according to Warren Buffett.
It also pays to understand the other reasons OUSM is a small-cap value “country club.” The ETF follows the O’Shares U.S. Small-Cap Quality Dividend Index. As its name implies, the gauge has dividend and quality criteria as a well as a not-mentioned low volatility box that stocks need to check. Plenty of smaller companies have trouble meeting one of those standards, let alone all three. As such, OUSM is bound to have a smaller roster than many rivals, but that’s not a commentary on long-term performance potential.
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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