The ALPS O’Shares U.S. Small-Cap Quality Dividend ETF (OUSM), launched on December 30, 2016, offers investors a way to gain exposure to the small-cap blend category of the market. But what exactly are smart beta ETFs?
Traditionally, the ETF industry has been dominated by products based on market cap-weighted indexes. These indexes are designed to mirror specific market segments or the market as a whole, providing a low-cost, transparent, and convenient method of replicating market returns. This approach works well for investors who believe in market efficiency.
However, there are investors who believe they can outperform the market by carefully selecting stocks. These investors often turn to smart beta ETFs, which track non-cap weighted strategies. These strategies, like the one used by OUSM, aim to identify stocks with a higher probability of delivering favorable risk-return performance. They achieve this by selecting stocks based on specific fundamental characteristics or a combination of such characteristics.
While the smart beta space offers a wide array of options, ranging from simple equal-weighting strategies to more complex fundamental and volatility/momentum based weighting methods, not all have consistently delivered top-tier results.
Fund Sponsor & Index:
Managed by Alps, OUSM has amassed over $666.01 million in assets, placing it among the average-sized ETFs within the Style Box – Small Cap Blend category. OUSM strives to mirror the performance of the FTSE Russell US Qual / Vol / Yield Factor 3% Capped Index, excluding fees and expenses. The underlying OShares U.S. Small-Cap Quality Dividend Index is designed to reflect the performance of publicly listed small-capitalization dividend-paying companies in the United States that exhibit high quality, low volatility, and substantial dividend yields.
Cost & Other Expenses:
Cost is a crucial aspect of choosing the right ETF, and cheaper funds can often outperform their more expensive counterparts when other fundamentals are equal. OUSM’s annual operating expenses are 0.48%, placing it on the higher end of the spectrum within its category. Its 12-month trailing dividend yield stands at 1.31%.
Sector Exposure and Top Holdings:
While ETFs provide diversified exposure to minimize single-stock risk, it’s still important to examine a fund’s holdings before investing. Thankfully, most ETFs are transparent products that disclose their holdings daily. The Financials sector holds the largest allocation in OUSM’s portfolio, representing 34.40%. Industrials and Consumer Discretionary round out the top three sectors. In terms of individual holdings, Juniper Networks Inc. (JNPR) accounts for approximately 2.02% of the fund’s total assets, followed by Tradeweb Markets Inc. (TW) and Encompass Health Corp. (EHC). The top 10 holdings collectively represent about 19.45% of OUSM’s total assets under management.
Performance and Risk:
OUSM has experienced a year-to-date gain of about 8.67% and a one-year return of approximately 16.66% (as of August 15, 2024). Over the past 52 weeks, it has traded between $33.36 and $44.13. The ETF has a beta of 1.05 and a standard deviation of 16.86% over the trailing three-year period. With approximately 107 holdings, OUSM effectively diversifies company-specific risk.
Alternatives:
ALPS O’Shares U.S. Small-Cap Quality Dividend ETF presents a viable option for investors aiming to outperform the Style Box – Small Cap Blend segment of the market. However, investors should also consider other ETFs within this category.
The IShares Russell 2000 ETF (IWM) tracks the Russell 2000 Index, while the iShares Core S&P Small-Cap ETF (IJR) tracks the S&P SmallCap 600 Index. IWM boasts $63.97 billion in assets, while IJR manages $81.88 billion. IWM carries an expense ratio of 0.19%, while IJR charges 0.06%. Investors seeking cheaper and lower-risk options might prefer traditional market cap-weighted ETFs designed to replicate the returns of the Style Box – Small Cap Blend.
