One of the most discussed themes in the early stages of 2026 has been the resurgence of small-cap stocks and the related ETFs, including those with exposure to value stocks.
Widely followed gauges of smaller stocks are easily outpacing the large-cap S&P 500 since the start of the year. Count the O’Shares U.S. Small-Cap Quality Dividend ETF (OUSM) as part of that group as that $932.82 million ETF is higher by 3.3% year-to-date.
OUSM could be an compelling consideration for equity income investors seeking small-cap exposure because the bulk of the traditional ETFs in this category sport anemic yields and have little leverage to potential dividend growers. Plus, the ALPS ETF also some value tendencies, which is notable because small-cap value is a potent combination.
“Small-value portfolios invest in small US companies with valuations and growth rates below those of other small-cap peers. Stocks in the bottom 10% of the capitalization of the US equity market are defined as small caps. Value is defined based on low valuations (low price ratios and high dividend yields) and slow growth (low growth rates for earnings, sales, book value, and cash flow),” observed Morningstar’s Tori Brovet.
OUSM Could Be Outstanding in 2026
As noted above, OUSM is off to a strong start in 2026. However, investors are right to not get caught up in three weeks of momentum. Smart market participants want to know how and why small-cap stocks and ETFs like OUSM could be winners over the course of this year, not just flash in the pan plays.
Multiple factors support the case for small-caps this year. First, there’s increasing sentiment among professional investors that market breadth is widening. In other words, asset allocators and even retail investors are looking for catalyst-rich winners outside of the mega-cap growth arena. Rotations of that nature could benefit smaller stocks.
The catalysts are there for that movement, including expectations that the Federal Reserve will continue lowering interest rates this year and that the U.S. economy will expand, perhaps more than economists are forecasts. Those factors are highly pertinent to investors considering OUSM because small stocks are economically and interest-rate sensitive. Other factors could also bode well for this ETF and its peers as 2026 unfolds.
“Geopolitical events—including the US ousting of Venezuelan President Nicolás Maduro, the Department of Justice’s investigation into Federal Reserve Chair Jerome Powell, and President Trump’s credit card interest rate cap proposal—will stimulate greater investment across the whole market in 2026,” said Morningstar’s Rachel Schuleter.
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