There May Be Alpha in Small-Cap Hills

Core Insights - Small-cap equities have shown impressive performance over the past 90 days, with some major indices recording double-digit gains, indicating responsiveness to Federal Reserve interest rate cuts [1] - The recent strength in small-caps may encourage investors to explore more sophisticated investment strategies, such as the O'Shares U.S. Small-Cap Quality Dividend ETF (OUSM) [2] Fund Overview - OUSM is a $917.8 million fund that emphasizes dividends, low volatility, and quality, distinguishing itself from many traditional small-cap ETFs [3] - The fund's methodology is seen as a potential driver for a rally into year-end, positioning it as a viable small-cap investment for 2026 [4] Market Outlook - Goldman Sachs Asset Management (GSAM) believes small caps present a strong investment opportunity, supported by easing cycles and attractive valuations, with earnings growth expected to accelerate [5] - Although OUSM was not directly mentioned in the GSAM report, it is suggested that nuanced approaches to small-cap investing could yield rewards [6] Sector Focus - GSAM highlights aerospace/defense, strong consumer names, healthcare, and technology as key sectors for small-cap investments, with OUSM allocating 63% of its portfolio to these sectors [7] Earnings Performance - U.S. small-cap earnings are showing signs of a strong rebound, with the second quarter of 2025 marking the first positive earnings due to improving sales and margins [8] - Notably, 25% of Russell 2000 companies have reported at least two consecutive quarters of accelerating earnings, with expectations for this momentum to continue into 2026 [8]