Seeking out Small-Cap Dividend Payers

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker, financial journalist, and money manager.

This week’s featured fund, the O’Shares FTSE Russell Small Cap Quality Dividend ETF (OUSM), tracks the FTSE USA Small Cap ex Real Estate 2Qual/Vol/Yield 3% Capped Factor Index.

OUSM reweights the index to reflect the performance of publicly listed small-capitalization, dividend-paying issuers in the United States based on three factors: high quality, low volatility and high dividend yield. The quality and low volatility factors are designed to reduce exposure to equities that pay high dividends but experience large price declines, as may occur with some dividend investing strategies.

Kevin O’Leary, chairman of O’Shares ETF Investments, is predicting that the U.S. small cap space presents a tremendous opportunity.

Small caps are significant companies, with most topping $1 billion in market value. As a group, small caps have provided attractive performance, despite O’Leary publicly stating he prefers lower risk levels.

“Most people don’t realize that $1,000 invested in U.S small caps 15 years ago would potentially been worth $3,385 today, compared to only $2,642 for U.S. large caps and now, with a strong U.S. dollar and the potential for reduced regulation to boost the U.S. economy, I have more reasons to own small caps,” O’Leary said in an interview.

There are several other advantages to investing in OUSM. Even though it has just $141.58 million in assets under management, OUSM is quite diversified at 223 holdings. Secondly, due to the nature of small-cap equities, investors may not be familiar or aware of many of OUSM’s holdings and would have to spend the time and energy on research if they wished to invest in them individually. OUSM cuts out all that hassle and conveniently offers exposure to high-quality small-caps in one place.

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The fund charges an expense ratio of 0.48%, which is the standard for O’Shares funds. It has a distribution yield of 2.53%.

Year to date, OUSM has moved slowly along with the broader market, returning just 1.48%. OUSM’s one-year return is 9.39%.

Top holdings in the fund are Steris Plc (STE), 3.40%; Bio-Techne Corp. (TECH), 2.31%; Encompass Health Corp. (EHC), 2.31%; Lazard Ltd. (LAZ), 2.26%; and Watsco Inc. (WSO), 1.99%.

OUSM’s sector exposure breakdown is as follows: Industrials, 23.83%; Financials, 17.51%; Consumer Discretionary, 16.66%. Information technology, 13.54%; Health Care, 9.41%; and Utilities, 7.61%.

For investors who are looking for small-cap quality dividend companies with low volatility, consider doing more research on O’Shares FTSE Russell Small Cap Quality Dividend ETF (OUSM).

I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

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