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Small-Cap Pullback May Make This ETF Appealing

BY | ETF Database
7:25 am ET 10/01/26 | 21 VIEWS
With soaring Treasury yields the likely culprit, previously hot small-cap stocks and ETFs are retreating. For example, the widely followed Russell 2000 Index shed 6.43% over the three months ending September 30.To its credit, the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF (OUSM A) was significantly less bad than the small-cap benchmark. It slipped just 1.29% over the course of the third quarter. Granted, three months is a short timeline, particularly when discussing the merits of dividend and small-cap investing. But OUSM’s less bad third-quarter showing is a testament to the ETF’s quality focus. Said another way, by some estimates, approximately 40% of Russell 2000 components aren’t profitable companies. And those are the very firms that are vulnerable to rising interest rates. So while this isn’t the “perfect” environment for smaller stocks, OUSM provides a compelling buffer against the Federal Reserve tightening rates. And that’s likely to happen once more before the end of 2026.More Reasons to Consider OUSMWhile there macroeconomic challenges, including high gas prices and other forms of sticky inflation, some experts believe the U.S. economy is mostly solid. That could portend long-term upside for smaller stocks and ETFs such as OUSM. “We do not believe that US small caps have permanently shifted to being an asset class dominated by speculative growth opportunities, and we expect the reversion to more fundamentally driven factors – such as a focus on companies’ financial strength and operations – to continue,” noted BNP Paribas. The $773.33 million OUSM, which turns 10 years old in December, has another perk. That is its robust exposure to cyclical sectors, including industrials, which account for more than 20% of the ETF’s roster.OUSM: Valid Consideration“If the cyclical recovery remains durable, market segments with higher exposure to the so-called ‘real’ economy should disproportionately benefit. Smaller, domestically focused companies are likely to be the prime beneficiaries of US-centric trends such as reshoring and increased infrastructure spending,” added BNP Paribas. Additionally, ETF’s such as OUSM remain valid considerations for investors heavily exposed to large- and mega-cap growth stocks. “The structural composition of small-cap indices offers a level of sector diversification and cyclicality lacking in larger indices. Small caps tend to be less concentrated in terms of sector exposure or top holdings meaning returns are not dominated by a small group of very large companies,” concluded the French bank. For more news, information, and analysis, visit the ETF Building Blocks Content Hub. VettaFi LLC (“VettaFi”) is the index provider for OUSM, for which it receives an index licensing fee. However, OUSM is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of OUSM.

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