Why Kevin O'Leary Loves His O'Shares Small-Cap ETF

It's good when investment managers eat their own cooking and that's the case with O'Shares ETFs Chairman Kevin O'Leary and the firm's O'Shares FTSE Russell Small Cap Quality Dividend ETF OUSM.

Home to about $110 million in assets under management, OUSM turned 3 years old at the end of 2019. Designed as a dividend growth, not a yield play, OUSM follows the FTSE USA Small Cap ex Real Estate 2Qual/Vol/Yield 3% Capped Factor Index.

“OUSM is an ETF that owns 200+ small cap quality dividend stocks, companies with strong profits and great dividends,” O'Leary said in a recent note. “Why own 2,000 small caps, including the unprofitable ones? I just want the companies that are profitable money machines.”

Why It's Important

Although it's not yield-based strategy, OUSM has a dividend yield of about 2%. That's not high-yield territory, but it's still a lot better than the average yield of 1.36% on the Russell 2000 and S&P SmallCap 600 indexes.

Indeed, OUSM is a different beast than the S&P SmallCap 600 and Russell 2000 indexes. The O'Shares ETF's overlap by weight to the S&P SmallCap 600 is just 13% and the same metric for the Russell 2000 is merely 14%.

While OUSM won't always outperform those small-cap benchmarks, investors can expect superior dividend growth and less volatility relative to those widely tracked indexes.

OUSM's “quality and low volatility factors are designed to reduce exposure to high dividend equities that have experienced large price declines, as may occur with some dividend investing strategies,” O'Shares notes.

What Happened

With many investors not adequately allocated to smaller stocks, O'Leary believes the time is right to revisit small caps and OUSM.

“We designed OUSM to invest in high quality small cap stocks by combining measures of profitability such as return on assets and leverage measured by operating cash flow to total debt,” he said. “This has generated strong performance and less risk than the Russell 2000. Investors may still be under-allocated to small cap stocks partly because active funds run by some of the best managers have closed.”

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