- Last month, the ALPS | O’Shares U.S. Small-Cap Quality Dividend ETF (OUSM) outperformed broader small-cap indices by nearly 150 basis points (bps) as its higher quality holdings saw several optimistic news announcements and better-than-expected earnings.
- Industrials, Consumer Discretionary and Utilities sectors led OUSM during the month on positive news catalysts. Vistra Corp. (VST, 1.25% weight* before being dropped) was OUSM’s best-performing name during September and returned 26.54% as the nuclear utilities company will benefit from the reopening of Three Mile Island, most famously known for its nuclear reactor meltdown in the 1970s, to help meet energy demand from Artificial Intelligence (AI) power consumption. Within OUSM’s Consumer Discretionary sector, Tapestry Inc. (TPR, 0.57% weight*), an accessories retailer, rallied 15.66% last month after the Federal Trade Commission (FTC) failed to show evidence that Tapestry’s acquisition of Capri Holdings (CPRI, not in OUSM) would be anti-competitive. Another OUSM clothing retailer, Ralph Lauren Corp. (RL, 0.71% weight*), returned nearly 14% in September as growth in its women’s clothing line, and in China, resulted in bullish commentary by analysts. Meanwhile, household retailer, Williams-Sonoma Inc. (WSM, 1.72% weight* before being dropped), returned over 10% last month after getting a sentiment boost from strong earnings reported by one of its home furnishing peers.
- Within OUSM’s Information Technology sector, Progress Software Corp. (PRGS, 0.74% weight*), increased 16.98% after strong demand across its enterprise software that runs high-performance applications led to the company beating expectations and raising full-year forecasts. Lastly, Tegna Inc. (TGNA, 0.78% weight*), a media and marketing company in OUSM’s Communication Services sector, rallied over 14% in September after being added to the S&P Small-Cap 600 Index.
“Analysts and investors are increasingly optimistic about small-caps' potential to outperform large-caps in the months ahead, driven by the likelihood that the U.S. won't fall into a recession and that interest rates will fall by as much as 1.5 percentage points by the end of 2025.”
– Sam Stovall, CFRA Research - Chief Investment Strategist, September 6, 2024
OUSM’s Small-Cap Portfolio: A Catch-Up Trade in the Making
- As the Federal Reserve embarks upon its easing campaign by cutting overnight lending rates, small-cap companies are expected to see greater benefits than large-caps as interest costs decrease on their floating rate debt. According to Bloomberg, large-cap companies are expected to grow earnings by over 10% in 2025, while OUSM’s quality small-caps are expected to grow their earnings by over 27% in 2025. OUSM’s sector tilts to consumer-oriented Industrials, Financials and Consumer Discretionary allow the Fund to be leveraged to the relatively healthy U.S. consumer, whose purchasing power should increase with interest rate declines.
- As of September 2024, small-caps trade at a historically wide discount to large-caps (nearly 11 turns on earnings per share (EPS)) but are expected to outpace large-caps’ EPS growth heading into 2025. Given the disproportionate outperformance of large-caps over small-caps within the past few years, a market anomaly is evident with small-caps’ superior expected earnings growth not yet reviving the commensurate outperformance of their share prices. We believe the ALPS | O’Shares U.S. Small-Cap Quality Dividend ETF (OUSM) offers a strong opportunity for investors to participate in the small-cap “catch-up trade”, while also offering potential protection against market volatility with its high-quality, dividend-paying portfolio of SMid-cap companies.
- Over the last 10 years, small-cap stocks have struggled to perform against large-caps and currently trade near historical relative lows as the AI trade in large-caps has exacerbated the disparity.
- With more interest rate cuts on the horizon and a strong earnings backdrop for small-caps, OUSM is poised to participate in the small-cap reversion trade that should potentially see the valuation gap close against large-cap stocks as we head into 2025.
Performance Summary
| Cumulative | Annualized |
|||||||
| 1 M | YTD | 1 Y | 3 Y | 1 Y | 5 Y | 10 Y | SI | |
| OUSM - NAV (Net Asset Value) | 2.16% | 16.03% | 30.07% | 35.36% | 30.07% | 10.62% | 12.52% | 10.04% |
| OUSM - Market Price | 2.05% | 14.92% | 28.21% | 28.38% | 28.21% | 10.65% | 12.53% | 10.10% |
| O’Shares U.S. Small-Cap Quality Dividend Index - TR1 | 2.22% | 16.49% | 30.77% | 37.32% | 30.77% | 11.15% | 13.61% | 13.33% |
| Morningstar US Small-Cap Broad Value Extended Index - TR | 1.07% | 8.40% | 24.32% | 14.70% | 24.32% | 4.68% | 10.51% | 6.71% |
Source: Bloomberg L.P. and SS&C ALPS Advisors, as of 09/30/2024
Performance data quoted represents past performance. Past performance is no guarantee of future results so that shares, when redeemed, may be worth more or less than their original cost. The investment return and principal value will fluctuate. Current performance may be higher or lower than the performance quoted. For current month-end performance call 1-866-759-5679 or visit www.alpsfunds.com. Performance includes reinvested distributions and capital gains.
Market Price is based on the midpoint of the bid/ask spread at 4 p.m. ET and does not represent the returns an investor would receive if shares were traded at other times.
Performance data prior to 06/21/2022 reflects the performance of the Fund as managed under the OSI ETF Trust.
Fund inception date: 12/30/2016, date reflects the commencement of investment operations.
1 The O’Shares U.S. Small-Cap Quality Dividend Index performance information reflects the blended performance of the FTSE USA Small Cap Qual/Vol/Yield 3% Capped Factor Index through 05/03/2018, the FTSE USA Small Cap ex Real Estate 2Qual/Vol/Yield 3% Capped Factor Index from 05/04/2018 through 05/31/2020 and the O’Shares U.S. Small-Cap Quality Dividend Index thereafter.
Total Operating Expenses: 0.48%
* Weight in OUSM as of 09/30/2024
Top 10 Holdings
| A O Smith Corp | 2.13% | Avnet Inc | 2.07% | |
| Dolby Laboratories Inc | 2.09% | Chemed Corp | 2.01% | |
| MSC Industrial Direct Co Inc | 2.08% | Donaldson Co Inc | 2.00% | |
| Robert Half Inc | 2.07% | Encompass Health Corp | 1.99% | |
| Lincoln Electric Holdings Inc | 2.07% | Houlihan Lokey Inc | 1.99% |
As of 09/30/2024, subject to change
Important Disclosures & Definitions
An investor should consider the investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus containing this and other information, call 1-866-759-5679 or visit www.alpsfunds.com. Read the prospectus carefully before investing.
Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemable.
Performance data quoted represents past performance. Past performance is no guarantee of future results; current performance may be higher or lower than performance quoted.
All investments are subject to risks, including the loss of money and the possible loss of the entire principal amount invested. Additional information regarding the risks of this investment is available in the prospectus.
Concentration in a particular industry or sector will subject the Fund to loss due to adverse occurrences that may affect that industry or sector. The Fund may use derivatives which may involve risks different from, or greater than, those associated with more traditional investments. A Fund’s emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform the market. Also, a company may reduce or eliminate its dividend after the Fund’s purchase of such a company’s securities.
The securities of small capitalization companies are often more volatile and less liquid than the stocks of larger companies and may be more affected than other types of securities during market downturns. Compared to larger companies, small capitalization companies may have a shorter history of operations, and may have limited product lines, markets or financial resources.
The Fund employs a “passive management” - or indexing - investment approach and seeks investment results that correspond (before fees and expenses) generally to the performance of its underlying index. Unlike many investment companies, the Fund is not “actively” managed. Therefore, it would not necessarily sell or buy a security unless that security is removed from or added to the underlying index, respectively.
Basis Point (bps): a unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.
FTSE USA Small Cap ex Real Estate 2Qual/Vol/Yield 3% Capped Factor Index: comprised of securities within the FTSE USA Small-Cap Index, excluding Real Estate. The index is designed to reflect the performance of three recognized equity risk factors: quality, low volatility and yield.
FTSE USA Small Cap Qual/Vol/Yield 3% Capped Factor Index: designed to reflect the performance of high quality US small-cap equities exhibiting low volatility and high dividend yields. Quality is measured by profitability and leverage. Constituents are selected and weighted based on quality, volatility and yield characteristics.
Morningstar US Small-Cap Broad Value Extended Index: designed to provide comprehensive, consistent representation of the small cap value segment of the US equity market.
O’Shares U.S. Small-Cap Quality Dividend Index: designed to reflect the performance of publicly-listed small-capitalization dividend paying issuers in the United States that meet certain market capitalization, liquidity, high quality, low volatility and dividend yield thresholds. The quality and low volatility requirements are designed to reduce exposure to high dividend equities that have experienced large price declines.
S&P Small-Cap 600 Index: seeks to measure the small-cap segment of the US equity market. The index is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable.
One may not invest directly in an index.
ALPS Advisors, Inc., registered investment adviser with the SEC, is the investment adviser to the Fund. ALPS Advisors, Inc. and ALPS Portfolio Solutions Distributor, Inc., affiliated entities, are unaffiliated with O’Shares Investments.
ALPS Portfolio Solutions Distributor, Inc. is the distributor for the Fund.
Not FDIC Insured • No Bank Guarantee • May Lose Value
OUS000352 01/31/2025
