Be Selective With Small-Cap Exposure Using This ETF

Getting small-cap exposure can subject investors to large moves toward the upside, but likewise during a downtrend. Given this, it's almost imperative to exercise selectivity when getting small-cap exposure. That's exactly what the ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM) does.

2023 skewed toward strength in large-caps as big tech. Specifically it did so toward that "Magnificent Seven." That cohort led the gains for last year's market rally. Small-cap companies have yet to catch up with their large-cap peers in the latest rally. But they are offering potential value in the marketplace. If there's an opportune time to take advantage of these valuations, now could be just as good of a time as any.

"Small-cap stocks have underperformed large caps, despite historically low valuations and a brightening economic outlook prompting increased investor interest," a Tip Ranks article said. But noted that small-cap companies do "face many challenges, including high sensitivity to economic conditions, lower profitability, and greater debt levels."

The article stated that because of the aforementioned factors, the potential for a small-cap rebound will be affected. If and when rate cuts finally happen, this could certainly improve conditions for small-caps, especially those that are laden with debt. They could refinance debt at lower rates and use the extra capital to reinvest in their companies for growth. Right now, the advancement of AI technology is continuing to power market gains for large cap companies. That's especially so for household names like Microsoft and Amazon.

'These factors weigh on the sector’s potential for a rebound amidst a concentrated market dominated by tech giants," Tip Ranks added. "Investors who wish to gain exposure to the sector are advised to selectively invest in small caps with solid fundamentals for potential growth."

Tilt Toward Quality

When betting on a small-cap rebound, it may be best to comb through the vast small-cap universe with a discerning filter that focuses on quality. This is exactly what OUSM does. It seeks to track the performance of the O’Shares U.S. Small-Cap Quality Dividend Index (OUSMX).

The index is designed to provide cost-efficient access to a portfolio of small-cap, high-quality, low volatility, dividend-paying companies in the U.S. selected based on fundamental metrics. Those include quality, low volatility, and dividend growth. Given this index exposure, ETF investors only get quality names in the small-cap universe. That potentially provides future upside at the current low valuations.

The fund also offers sector diversification, eschewing a heavy focus on technology names. Instead, the sector breakdown tilts toward industrials, consumer discretionary, and financials.

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.

For more news, information, and analysis, visit the ETF Building Blocks Channel.

Read more on ETFTrends.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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