Is ALPS O'Shares U.S. Small-Cap Quality Dividend ETF a Strong ETF Right Now?

Making its debut on 12/30/2016, smart beta exchange traded fund ALPS O'Shares U.S. Small-Cap Quality Dividend ETF OUSM provides investors broad exposure to the Style Box - Small Cap Blend category of the market.

What Are Smart Beta ETFs?

Products that are based on market cap weighted indexes, which are strategies designed to reflect a specific market segment or the market as a whole, have traditionally dominated the ETF industry.

Because market cap weighted indexes provide a low-cost, convenient, and transparent way of replicating market returns, they work well for investors who believe in market efficiency.

There are some investors, though, who think it's possible to beat the market with great stock selection; this group likely invests in another class of funds known as smart beta, which track non-cap weighted strategies.

This kind of index follows this same mindset, as it attempts to pick stocks that have better chances of risk-return performance; non-cap weighted strategies base selection on certain fundamental characteristics, or a mix of such characteristics.

Even though this space provides many choices to investors--think one of the simplest methodologies like equal-weighting and more complicated ones like fundamental and volatility/momentum based weighting--not all have been able to deliver first-rate results.

Fund Sponsor & Index

The fund is managed by Alps. OUSM has been able to amass assets over $666.01 million, making it one of the average sized ETFs in the Style Box - Small Cap Blend. This particular fund seeks to match the performance of the FTSE Russell US Qual / Vol / Yield Factor 3% Capped Index before fees and expenses.

The OShares U.S. Small-Cap Quality Dividend Index is designed to reflect the performance of publicly-listed small-capitalization dividend-paying issuers in the United States exhibiting high quality, low volatility and high dividend yields.

Cost & Other Expenses

Cost is an important factor in selecting the right ETF, and cheaper funds can significantly outperform their more expensive cousins if all other fundamentals are the same.

Annual operating expenses for this ETF are 0.48%, making it one of the more expensive products in the space.

OUSM's 12-month trailing dividend yield is 1.31%.

Sector Exposure and Top Holdings

Even though ETFs offer diversified exposure which minimizes single stock risk, it is still important to look into a fund's holdings before investing. Luckily, most ETFs are very transparent products that disclose their holdings on a daily basis.

Representing 34.40% of the portfolio, the fund has heaviest allocation to the Financials sector; Industrials and Consumer Discretionary round out the top three.

Taking into account individual holdings, Juniper Networks Inc. JNPR accounts for about 2.02% of the fund's total assets, followed by Tradeweb Markets Inc. TW and Encompass Health Corp. EHC.

Its top 10 holdings account for approximately 19.45% of OUSM's total assets under management.

Performance and Risk

The ETF has gained about 8.67% so far this year and is up about 16.66% in the last one year (as of 08/15/2024). In the past 52-week period, it has traded between $33.36 and $44.13.

The ETF has a beta of 1.05 and standard deviation of 16.86% for the trailing three-year period. With about 107 holdings, it effectively diversifies company-specific risk.

Alternatives

ALPS O'Shares U.S. Small-Cap Quality Dividend ETF is a reasonable option for investors seeking to outperform the Style Box - Small Cap Blend segment of the market. However, there are other ETFs in the space which investors could consider.

IShares Russell 2000 ETF IWM tracks Russell 2000 Index and the iShares Core S&P Small-Cap ETF IJR tracks S&P SmallCap 600 Index. IShares Russell 2000 ETF has $63.97 billion in assets, iShares Core S&P Small-Cap ETF has $81.88 billion. IWM has an expense ratio of 0.19% and IJR charges 0.06%.

Investors looking for cheaper and lower-risk options should consider traditional market cap weighted ETFs that aim to match the returns of the Style Box - Small Cap Blend.

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