How to Invest In Small-Cap Stocks For Long-Term Benefits


Small-cap stocks offer several unique advantages to investors over other types of stocks. They often yield high returns due to several factors including the lack of available information. Their growth prospects are literally limitless. However, the liquidity of small-cap stocks is lower, therefore they are subject to more volatility.

So, how should you invest in such stocks to ensure long-term benefits? Read on to know more!

The Small-cap Stock Investment

Investments in small-cap stocks come with their own set of pros and cons. There is no one clear definition of small-cap investments— different organizations, individuals, and analysts use different versions of their definitions but one thing is certain: according to the SEC specific market capitalization define these investments.

Small-cap investments often yield high returns. Reasons for this include: low floats, inappropriate pricing due to a severe lack of information or a limited number of investors influencing market conditions. The lack of resources makes it difficult to ascertain the reliability of the investment. This is a double edged sword as it can yield staggering gains or severe & swift losses.

Some mall-cap exchange-traded funds tend to smooth out the volatility factor inevitably associated with this sector. Consider the O’Shares FTSE Russell Small Cap Quality Dividend ETF. At $133.48M, OUSM tracks the FTSE USA Small Cap ex Real Estate 2Qual/Vol/Yield 3% Capped Factor Index.

But what’s the underlying principle? As O’Shares puts it, the OUSM’s underlying index “is designed to reflect the performance of publicly-listed small-capitalization dividend-paying issuers in the United States exhibiting high quality, low volatility and high dividend yields, as determined by FTSE Russell.”

They also add, “The 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.”

Why You Should Consider this Index

OUSM and other such small-cap dividend ETFs provide investors with a greater yield than their counterparts. It provided returns of about 18% ever since it started nearly 22 months ago. OUSM also provided a trailing 12-month dividend yield of 1.93%. This is considerably higher than the 1.15% 12-month yield on the S&P SmallCap 600 and Russell 2000 Index. In fact, most of the premium holdings of OUSM have yielded dividends north of 3%.

While OUSM is a dividend ETF, it is still the fund’s second-largest sector allocation. It also has a much higher technology exposure than the S&P SmallCap 600 and the Russell 2000 Index.

Furthermore, small-cap dividend players will outperform the smaller stocks (that do not pay dividends) over the long-term by a statistically significant margin. Per O’Shares data, while the Russell 2000 Index provided average annualized returns amounting to 10%, the Russell 2000 Dividend Growth Index provided 12.4% over a period spanning two decades.

The writing on the wall is clear. For strategic and data back gains, research, and consider OUSM or other such ETFs which have an obvious edge over their rivals.