OUSM: A SMID Dividend Strategy That Does Not Stand Out

seekingalpha05-08

agrobacter/E+ via Getty Images In the sprawling ETF universe, finding a true gem is a complicated task. This is not because the overweening majority of investment vehicles have countless problems and,...

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This is not because the overweening majority of investment vehicles have countless problems and,...</p>\n\n<a href=\"https://seekingalpha.com/article/4690606-ousm-a-smid-dividend-strategy-that-does-not-stand-out\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>OUSM: A SMID Dividend Strategy That Does Not Stand Out</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nOUSM: A SMID Dividend Strategy That Does Not Stand Out\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-05-08 16:46 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4690606-ousm-a-smid-dividend-strategy-that-does-not-stand-out><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>agrobacter/E+ via Getty Images In the sprawling ETF universe, finding a true gem is a complicated task. This is not because the overweening majority of investment vehicles have countless problems and,...</p>\n\n<a href=\"https://seekingalpha.com/article/4690606-ousm-a-smid-dividend-strategy-that-does-not-stand-out\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"IJR.AU","symbol_name":"ISHARES S&P SMALL CAP ETF/AU","start_time":0,"source_url":"https://seekingalpha.com/article/4690606-ousm-a-smid-dividend-strategy-that-does-not-stand-out","article_id":"2433712482","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1027165934/image_1027165934.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2433712482","pubTimestamp":1715158006,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"agrobacter/E+ via Getty Images In the sprawling ETF universe, finding a true gem is a complicated task. This is not because the overweening majority of investment vehicles have countless problems and, for that reason, are worth steering clear of. In fact, most funds are just fine, but there is nothing remarkably bullish about them. Put another way, they fail to stand out. An ETF that I am providing an update on today is a perfect example of such a play. As I explained in my November 2022 note, the ALPS O'Shares U.S. Small-Cap Quality Dividend ETF Shares  had solid quality but insufficient value exposure. Its past performance was nuanced, while the dividend yield was hardly compelling. With a year and a half since that analysis, we see largely the same story under the hood, though with new nuances as well. 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This is not because the overweening majority of investment vehicles have countless problems and, for that reason, are worth steering clear of. In fact, most funds are just fine, but there is nothing remarkably bullish about them. Put another way, they fail to stand out. An ETF that I am providing an update on today is a perfect example of such a play. As I explained in my November 2022 note, the ALPS O'Shares U.S. Small-Cap Quality Dividend ETF Shares (BATS:OUSM) had solid quality but insufficient value exposure. Its past performance was nuanced, while the dividend yield was hardly compelling. With a year and a half since that analysis, we see largely the same story under the hood, though with new nuances as well. That is to say, I decided that today's note should have a primarily neutral tone with no rating upgrade, which does not mean significant advantages and downsides are not to be reviewed. So let us dig into the data. What is OUSM? But before we start the discussion of the factor nuances, an important step worth making is to explain what OUSM actually does. In essence, this is a strategy focused on a factor quintet: small size, dividend yield, dividend quality, low volatility, and quality (balance sheet soundness and profitability). Incepted in December 2016, it has been trading with the O'Shares U.S. Small-Cap Quality Dividend Index only since June 2020. For that reason, the data prior to the index change will be ignored in the performance analysis section. In the fact sheet on the O'Shares website, the following description of the index is provided: Index constituents are comprised of approximately 100 U.S. Small-Cap companies with the highest quality as measured by O’Shares’ rules-based methodology emphasizing profitability, dividend growth & coverage, debt, and volatility. As we know from the summary prospectus available on its website, to qualify for inclusion, a U.S. company must be a constituent of the S-Network US Equity Mid/Small-Cap 2500 Index. Importantly, materials, energy, and real estate are completely ignored. I regard this as a double-edged sword. While the absence of these sectors definitely removes some cyclical risks from the equation and dampens volatility as a consequence, probably reducing potential maximum drawdowns as well, the flip side here is that cyclical upsides supported by rising commodity prices and/or real estate market recovery (for instance, bolstered by a lower interest rate regime) will also be mostly missed. OUSM has a lot of characteristics I like Let us begin with advantages, something OUSM is not short of. Quality exposure First, its quality is close to exemplary, especially considering this is a SMID portfolio with a weighted-average market cap of $8.7 billion as of May 7, as per my calculations. It is worth remarking that this market cap figure should not be surprising. This is the reality of small-cap investing. In many cases, ETFs that target small caps end up being overweight in mid caps or even in their larger counterparts. For OUSM, the mix is as follows:   Equity echelon OUSM (holdings as of May 6)   Small-cap (below $2 billion) 1.5%   Mid-cap ($2 billion–$10 billion) 73.4%   Large-cap (above $10 billion) 25%   Click to enlarge Calculated by the author using data from Seeking Alpha and the ETF. Financial data as of May 7 As we can see, there are much more large-cap names than small-cap names in this portfolio. Regardless, in its basket of 106 equities, with the consumer discretionary sector being the essential allocation (22.64%), all the companies are profitable, with only one name being cash flow-negative, Patterson Companies (PDCO). Most importantly, just 1.5% of the holdings have a D+ Quant Profitability grade or worse, while 89% have a B- grade or higher. Next, capital efficiency indicators are comfortably above the levels I consider optimal, with the Return on Assets being especially strong. Return on Equity, which was adjusted for the impact of Cogent Communications' (CCOI) unrealistically high four-digit figure skewed by its debt, is also fairly robust.   Metric OUSM (holdings as of May 6)   ROA 10%   Adjusted ROE 24.4%   Click to enlarge Calculated by the author using data from Seeking Alpha and the ETF However, the OUSM portfolio's advantages are not limited to margins and capital efficiency. There is something to appreciate on the debt front, too. In my article on the Invesco S&P SmallCap 600 Revenue ETF (RWJ) that was published just recently, I discussed the debt issue that investors might miss upon unattentive inspection. But in sharp contrast to RWJ, OUSM has just 28.4% allocated to companies with net debt/EBITDA above 2x. RWJ had about 51% invested in such names. Most importantly, those with that ratio exceeding 4x account for only 5.3%. Next, what is especially interesting is that the net debt is negative for more than 30% of the companies present, which means their total cash exceeds their total debt. Next, it is also pertinent to remark that OUSM does deliver on low volatility, with a weighted-average 24-month beta of only 0.91, as per my calculations. Speaking about dividend quality and growth, there is again something to appreciate about OUSM:   Metric OUSM (holdings as of May 6)   Quant Dividend Safety B- or higher 67.3%   Quant Dividend Consistency B- or higher 57.1%   Quant Dividend Growth B- or higher 85.2%   3Y Dividend CAGR (weighted-average) 12.7%   5Y Dividend CAGR (weighted-average) 10.4%   Click to enlarge Calculated by the author using data from Seeking Alpha and the ETF Next, valuation-wise, OUSM has a fairly adequate story under the hood, with its weighted-average earnings yield standing at 6.1%, bolstered mainly by the financial sector stocks. However, a nuance here is that less than 20% of the net assets are allocated to companies with a B- Quant Valuation rating or higher. Key issues that make OUSM only a Hold Here, I see two key problems: its low dividend yield and relatively sluggish performance since the index change. Besides, growth characteristics are just average. Dividend yield Regarding the dividend yield, my calculations showed the weighted-average DY of the portfolio was just 1.87% as of May 7, while the ETF itself is yielding only 1.51%. For context, the iShares Core S&P 500 ETF (IVV), which is heavy in tech and growth stocks and is obviously not dividend-oriented, has a DY of 1.33%. Performance OUSM's performance since the index change does not impress me. For example, while it has outperformed the iShares Core S&P Small-Cap ETF (IJR) and the iShares Core S&P Mid-Cap ETF (IJH), it was unable to keep pace with IVV and the WisdomTree U.S. MidCap Dividend Fund ETF (DON).    Portfolio IVV OUSM IJR DON IJH   Initial Balance $10,000 $10,000 $10,000 $10,000 $10,000   Final Balance $17,578 $17,242 $16,725 $18,118 $17,208   CAGR 15.49% 14.92% 14.03% 16.39% 14.86%   Stdev 17.33% 17.52% 21.65% 18.52% 19.90%   Best Year 28.76% 25.93% 40.41% 30.24% 31.97%   Worst Year -18.16% -7.88% -16.19% -4.85% -13.10%   Max. Drawdown -23.93% -18.33% -23.11% -13.94% -21.57%   Sharpe Ratio 0.79 0.75 0.61 0.79 0.68   Sortino Ratio 1.29 1.35 1.07 1.39 1.18   Market Correlation 1 0.92 0.87 0.88 0.93   Click to enlarge Data from Portfolio Visualizer. The period is June 2020–April 2024 Next, even though compared to the cohort of dividend ETFs I cover it delivered a rather solid 3-year total return, 22.3% vs. the median of 12.98%, it was obviously not the best as it underperformed 10 ETFs, most notable among them being the Fidelity High Dividend ETF (FDVV), the WisdomTree U.S. Quality Dividend Growth Fund ETF (DGRW), and the First Trust NASDAQ Technology Dividend Index Fund ETF (TDIV).    ETF 3Y Total Return   FDVV 33.36%   DGRW 32.85%   TDIV 30.12%   Click to enlarge Data from Seeking Alpha Growth nuances I would not say that OUSM is offering a lot on the growth front at this juncture. But the weighted-average growth rates of its portfolio are not subdued either. They are healthy, but just not great.   Metric OUSM (holdings as of May 6)   EPS Fwd 6.5%   Revenue Fwd 3.6%   EBITDA Fwd 4.7%   Click to enlarge Calculated by the author using data from Seeking Alpha and the ETF Obviously, in a scenario with the bull market progressing, there is a risk of OUSM underperforming the S&P 500 because of its unappealing growth profile. Final thoughts  OUSM has a few remarkable advantages, with its large exposure to companies with negative net debt perhaps being the most important one, assuming record high interest rates. However, for a Buy rating, I would like to see more arguments. I am not impressed by its dividend yield, while past performance leaves a lot to be desired. Besides, its 48 bps expense ratio looks fairly burdensome.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2433712482"}