As an experienced investor, allow me to decode the financial jargon and present to you an insightful analysis of a promising Exchange Traded Fund (ETF) – ALPS O’Shares U.S. Small-Cap Quality Dividend ETF (OUSM).
Being the new kid on the block isn’t always a drawback. Case in point: The ‘ALPS O’Shares U.S. Small-Cap Quality Dividend ETF’ (OUSM) that first graced the market on the last day of 2016. OUSM offers broad exposure to the Style Box – Small Cap Blend segment of the market.
Now, you might ask, what exactly does this mean? Well, let’s break it down.
Catching the Smart Beta Wave: Art or Science?
In the world of ETFs, products based on market cap weighted indexes have traditionally had the upper hand. Their low-cost model and transparency make them particularly appealing to investors who hold the market’s efficiency in high regard.
However, there’s another breed of investors who like to play the game differently. They believe in beating the market with smart stock selection. To cater to their needs, there’s a class of funds called ‘smart beta’. This group does not follow market cap weighted strategies. Instead, they go with non-cap weighted strategies, trying to identify promising stocks based on certain fundamental characteristics or a specific mix of these.
Think about it this way – it’s like choosing a team not for the biggest players, but for the players who could perform best under specific conditions. It’s a different ball game altogether and not all have been able to score points in this arena.
Meet the Captain: Fund Sponsor & Index
Alps is at the helm, managing the fund. Over time, OUSM has amassed a tidy sum of over $666.01 million, placing it among the average-sized ETFs in the Style Box – Small Cap Blend category. The fund aims to mirror the performance of the FTSE Russell US Qual / Vol / Yield Factor 3% Capped Index, minus the fees and expenses.
What’s this index all about? Well, the OShares U.S. Small-Cap Quality Dividend Index aspires to portray the performance of small-cap, dividend-paying public issuers in the U.S. with elements of quality, low volatility, and high yields.
Now, let’s talk about the elephant in the room – the cost. With an annual operating expense of 0.48%, OUSM is among the more expensive products in its category. However, as we all know, cost is not the only decisive factor. Much depends on the fund’s performance and dividends, the latter of which is at a respectable 1.31%.
Though ETFs offer a diversified exposure, reducing single stock risk, a sneak peek into a fund’s holdings can be a good way to gauge its potential. Good news is, most ETFs are quite transparent and disclose their holdings daily.
Coming to OUSM, it flaunts a hefty 34.40% allocation to the Financials sector, with Industrials and Consumer Discretionary rounding out the top three. Notable individual holdings include Juniper Networks Inc. (JNPR), Tradeweb Markets Inc. (TW), and Encompass Health Corp. (EHC) – accounting for 19.45% of OUSM’s total assets.
The ETF’s performance till date boasts a gain of about 8.67% this year and a significant hike of 16.66% over the last year (as of 08/15/2024). Balancing out this good news is its beta of 1.05 and standard deviation of 16.86% for the trailing three-year period, pointing towards a moderate level of risk. Nevertheless, with about 107 holdings, the fund is successful in diversifying company-specific risk.
The Alternatives: Other Similar ETFs
Every investor must consider alternatives, and in the Style Box – Small Cap Blend space, there are other ETFs to ponder upon. The iShares Russell 2000 ETF (IWM), for instance, tracks the Russell 2000 Index, while the iShares Core S&P Small-Cap ETF (IJR) follows the S&P SmallCap 600 Index. However, these come with their costs, 0.19% for IWM and 0.06% for IJR.
End of the day, the choice is yours. Whether you’re a traditionalist preferring market cap weighted ETFs or someone seeking opportunities in the innovative smart beta funds like OUSM, there’s a whole world of options out there.
Remember, it’s not just about numbers or graphs; it’s about understanding the market’s rhythm and finding your groove. Here’s to informed and successful investing!
