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OUSM Rallies in June as the Catch-Up Trade Takes Hold

  • Last month, the ALPS | O’Shares U.S. Small-Cap Quality Dividend ETF (OUSM) rallied 8.12%, outperforming broader equities markets as the rally within expensive mega caps spilled over to the cheaper side of the market. OUSM’s quality stock selection within small caps in the Healthcare, Utilities and Financials sectors led the relative outperformance last month.

  • The Industrials sector led OUSM’s absolute gains in June as earnings estimates began to rise on the heels of lower cost inflation going forward. Wood manufacturer, UFP Industries Inc. (UFPI, 0.40% weight*), rose over 24% in June on the back of improving manufacturing data and stronger US jobs figures that also rallied homebuilders. ITT Inc. (ITT, 0.80% weight*), a maker of industrial products, also surged nearly 23% last month after announcing a EUR 50M capacity expansion in its high-performance brake pad applications, as well as new solar panel production agreements. Similarly, Tetra Tech Inc. (TTEK, 0.71%  weight*), a provider of engineering services, gained over 18% in June after winning a £60 million contract with a Scottish water utility company and a $200 million flood risk infrastructure contract from the US Army Corps of Engineers. Lastly, welding product manufacturer, Lincoln Electric (LECO, 2.66% weight*), jumped over 17% in June on positive analyst comments, citing record operating margin and strong earnings per share (EPS) projections arising from electric vehicle (EV) charger growth.

  • OUSM’s Financials names also ticked higher in June, with global investment firm, Artisan Partners Asset Management (APAM, 0.75% weight*), jumping nearly 23% following the company’s inclusion in the S&P SmallCap 600 Index. Investment bank, Moelis & Co (MC, 1.35% weight*), similarly returned over 22% last month after stating the company is positioning itself for a rise in merger and acquisition (M&A) activity amidst a potential revival in transactions in US markets. Additionally, private market investment manager, Hamilton Lane Inc. (HLNE, 0.57% weight*), gained over 18% last month on plans for a joint venture with artificial intelligence (AI) wealth platform, TFIN (not in OUSM*), to create an AI-powered investment assistant with access to more than $16.7 trillion in private market commitments.

“Small stocks trade at a valuation discount relative to large caps, suggesting now is an attractive entry point for investors with multi-year investing time horizons.”

– Goldman Sachs Strategist, Lily Calcagnini, June 28, 2023

Valuation Gaps of this Magnitude in Small Caps vs. Large Caps Never Last Long
  • With the first half of 2023 in the books, small caps currently exhibit spreads near decade highs on relative valuations and forward earnings growth compared to large caps, offering a glaring opportunity for a potential positive reversion to historical norms for US small caps as cost inflation cools on resilient macro data. Currently, small-cap stocks, as measured by the Russell 2000 Index, trade at 14x forward positive earnings estimates vs. the S&P 500 Index (large caps) at 19x, a historically wide valuation gap that has tended to close swiftly on supportive macro data.  

  • When allocating to small caps, diligence in choosing quality small-cap stocks is warranted to avoid many small-cap companies that face liquidity and customer financing needs, where high interest rates can negatively impact their businesses. OUSM’s quality dividend-paying small caps are inherently better capitalized and more profitable than its peers, which has historically led to OUSM’s outperformance relative to broad-based small-cap indices. For example, nearly ~ 27% of companies in the Russell 2000 Index have negative earnings^, while OUSM screens for high profitability and dividend growth with all of its companies exhibiting positive earnings.  
  • Over the last five years, OUSM has handily outperformed its peer group, as its quality screens focus on return on assets (ROA) rather than return on equity (ROE), which can be easily manipulated in the short-term by management teams - many times at the expense of the long-term. 

  • Additionally, despite its higher historical returns, OUSM has exhibited lower volatility (standard deviation) relative to the WisdomTree U.S. SmallCap Quality Dividend Growth Fund (DGRS).  

Performance Summary
  1 Week YTD 1 Y 3 Y
ALPS | O’Shares U.S. Small-Cap Quality Dividend ETF (OUSM) 8.12% 10.25% 18.27% 55.17%
O’Shares U.S. Small-Cap Quality Dividend Index - TR1 8.18% 10.48% 18.79% 57.36%
Russell 2000 Value Index - TR 7.94% 2.50% 6.01% 53.78%

Source: Bloomberg L.P., as of 06/30/2023 

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.

For standardized performance please click here.

Performance data prior to 06/21/2022 reflects the performance of the Fund as managed under the OSI ETF Trust.

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.

* Weight in OUSM as of 06/30/2023

^ As of 06/30/2023


Top 10 Holdings

Lincoln Electric Holdings Inc 2.66%   A O Smith Corp 2.37%
Watsco Inc 2.48%   Interpublic Group of Cos Inc/The 2.37%
Encompass Health Corp 2.45%   Houlihan Lokey Inc 2.34%
Graco Inc 2.44%   National Instruments Corp 2.24%
Snap-on Inc 2.40%   Amdocs Ltd 2.19%

As of 06/30/2023, 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 are not individually redeemable. Investors buy and sell shares on a secondary market. Only market makers or “authorized participants” may trade directly with the Fund, typically in blocks of 5,000, 25,000 or 50,000 shares.

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.

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.

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.

Russell 2000 Index: measures the performance of the small-cap segment of the US equity universe.

Russell 2000 Value Index: measures the performance of the small capitalization value sector of the US equity market.

S&P 500 Index: widely regarded as the best single gauge of large-cap US equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

S&P SmallCap 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.

WisdomTree U.S. SmallCap Quality Dividend Growth Index: a fundamentally weighted index that consists of the small-capitalization segment of dividend-paying stocks with growth characteristics.

One may not invest directly in an index.

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  

OUS000222  10/31/2023

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