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]

Core Insights - The Lazard US Systematic Small Cap Equity ETF (SYZ) has an annualized total return of 3.56% since its inception, outperforming the benchmark Russell 2000 Index, which has a return of -0.04% [1] - The ETF was converted from a mutual fund on September 12, 2023, and has been trading for 17 days as an ETF [1] - The ETF's portfolio consists of 427 small-cap stocks selected through a proprietary automated process, with market caps ranging from $54.5 million to $15.9 billion [6] Investment Opportunities - The ETF's valuation metrics show an average price-to-cash flow ratio of 9.93x, significantly lower than the Russell 2000's 15.07x, and a free cash flow yield of 6.57%, compared to the index's 1.98% [7] - Notable holdings in the ETF include Mueller Industries (MLI), which has nearly doubled its market cap from $5.5 billion to $10.9 billion in 22 months, and is trading at 14.6 times its 2025 earnings per share estimate of $6.75 [9] - Perimeter Solutions (PRM), the ETF's seventh-largest holding, has seen a 73% increase in its stock price in 2025, with sales growth of 26% to $234.7 million in the first half of 2025 [10][11] - Willdan Group (WLDN) has a market cap of $1.4 billion and reported a 27.5% increase in net revenues to $180.3 million in the first half of 2025, with a full-year revenue guidance of $345 million [17][19] Market Context - The ETF's recent performance is set against a backdrop where U.S. stocks experienced a decline for the first time in eight trading sessions, while gold prices reached a record high of over $4,000 [5] - The small-cap sector is gaining attention as large-cap stocks have become expensive, prompting a shift in focus towards smaller companies [4]

Core Insights - Small-cap stocks are losing performance compared to large-cap stocks due to private equity and venture capital firms acquiring promising small companies that would have otherwise gone public [2] - A widening gap in quality between large-cap and small-cap stocks has been observed, with small-cap stocks showing weaker fundamentals in terms of returns on assets, returns on equity, net margin, and debt-to-capital ratios [2] - The trend indicates that many potential future large-cap stocks are remaining private, limiting opportunities for public investors [3] Performance Analysis - From 1991 to 2024, the US Small Cap Index lagged the US Large Cap Index by an average of 0.49% per year, resulting in a cumulative lag of 400% [3] - Small-cap stocks outperformed large-caps from the mid-1990s until around 2014, after which the growth of the small-cap index began to decline [3] Active Management Opportunities - A recent whitepaper suggests that it may be a time for active small-cap managers to demonstrate their value, although they face challenges due to limited access to high-growth potential small-cap stocks that remain in private markets [4] - Despite the challenges, small-cap managers have shown a median alpha of approximately 57% compared to their benchmarks from 1994 to 2024, while mid-cap and large-cap managers had negative alpha of about 15% each [5] Market Inefficiency - The small-cap market is characterized by inefficiency, with an average of only six analysts per small-cap stock, compared to 17 for mid-cap and 30 for large-cap stocks [5] - Over the past decade, a higher percentage of small-cap managers have outperformed their benchmarks compared to large-cap managers [5]

Core Viewpoint - The Vanguard Small-Cap ETF (NYSEARCA: VB) is recommended for a buy rating, with expectations that small-cap stocks are poised for a new cycle of outperformance against large-cap stocks due to their low valuation levels and strong fundamentals [1]. Group 1 - Small-cap stocks are anticipated to outperform large-cap stocks in the near future [1]. - The low valuation levels of small-cap stocks are highlighted as a key factor for their potential outperformance [1]. - Strong fundamentals of small-cap companies are also noted as a contributing factor to this expected performance [1].