Who's Benefited from the Small-Cap Rally?

Now Paul, given the recent bounce in US small caps, how has the Alpso shares US small cap quality dividend ETF's quality dividend strategy influenced its relative performance and risk profile?

If you look at the bottom that was reached off of the Liberation Day tariff impact on the market right around April 9th, April 10th, small caps had a really violent rally off of that bottom. But interestingly, the worst companies in that index, the companies that don't make money, have been in leadership. In fact, if you just do a chart of the companies that generate profits versus the companies that don't generate profits in the Russell 2000, and remember about 40% of the Russell 2000 is not profitable.

It's been the unprofitable companies that have been in leadership, and that's weighed on OUSM's relative performance because OUSM is designed to focus exclusively on companies that generate profitability as measured by ROA without excess leverage, and not only pay a dividend, but grow a dividend and have well-covered dividends. That is not what has been rewarded in this rally so far in 2025 in the small cap universe.

Our argument is even though from a relative performance perspective, OUSM has lagged the index as measured by the Russell 2000, the design of OSM is to provide a durable, consistent, risk-adjusted performance profile over long periods of time because of its focus on high-quality companies with high-quality dividends. And even if the rally that we've seen so far off of the bottom from Liberation Day has largely been led by the lowest quality companies in that segment of the market.

History tells us that owning high-quality companies in this segment of the market is a way to ensure that your drawdowns are typically shallower, your risk-adjusted performance has been significantly better than that of the overall index. And so in many ways, it's a situation where you don't necessarily want to throw the baby out with the bathwater, as it were, when you're thinking about small caps. We do continue to be constructive on small caps in terms of the outlook for their relative performance as the Fed continues to ease.

But just because you've seen leadership from low-quality companies in the universe doesn't mean that's likely to persist over the long term. And that's why OSM was designed to be a long-term strategic allocation, not a tactical allocation.