Why This Small-Cap ETF Matters Right Now

Not surprisingly, small-cap stocks and the related exchange traded funds have not offered investors much shelter from the broader market's recent turbulence. Over the past week, the large-cap S&P 500 is lower by 4.3%, but that percentage jumps to 4.77% for the S&P SmallCap 600 Index.

What Happened

For long-term investors, adding dividends to the small-cap equation can be a fine idea for smoothing out volatility and potentially boosting returns. On that note, the O'Shares FTSE Russell Small Cap Quality Dividend ETF OUSM is an ETF to consider.

OUSM tracks the FTSE USA Small Cap ex Real Estate 2Qual/Vol/Yield 3% Capped Factor Index, which is a basket of low volatility high dividend payers.

“The quality and low volatility factors are designed to reduce exposure to high dividend equities that have experienced large price declines, as may occur with some dividend investing strategies,” according to O'Shares.

Why It's Important

What sectors are not represented in OUSM are arguably as important as those that are not. Over the past decade, energy and materials names were the most volatile components in the S&P SmallCap 600, but OUSM allocates less than 10% of its weight to those groups.

Over the same period, energy and communication services were the worst-performing sectors in the small-cap benchmark, but OUSM allocates just 3.52% of its weight to those sectors. Conversely, health care and technology were the best-performing sectors in the S&P SmallCap 600 and OUSM has combined weight of over 24% to those groups.

What's Next

As is the case with many dividend strategies, OUSM can be a less volatile bet than its non-dividend rivals. Consumer staples and utilities, nearly 11% of the ETF's combined weight, were the least volaile sectors in the S&P SmallCap 600 over the past decade, according to O'Shares data.

While OUSM is not a high dividend strategy, the fund does yield 2.14%, or nearly 70 basis points more than the S&P SmallCap 600.

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