The recent performance of the Russell 2000 has investors concerned about its profitability. After a 10.1% gain in July, the index has dropped approximately 4% in August. ALPS’ Paul Baiocchi attributes this volatility to the index’s composition, citing Apollo Global’s estimate that 40% of companies included in the Russell 2000 have negative earnings. Investors have reluctantly accepted the ups and downs of the index, resigning themselves to the reality of being in the Russell 2000.
Seeking Quality Companies
Paul Baiocchi recommends that investors shift their focus to quality companies in order to avoid the profitability drag. One way to achieve this is by looking at more selective exchange-traded funds, such as the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares (OUSM). The emphasis is on quality companies that not only pay and grow their dividends but also exhibit less volatility compared to their peers. This strategy allows investors and advisors who have experienced small caps stagnating for five years to allocate their investments to a category that has been lagging.
Portfolio Composition
In contrast to the Russell 2000, the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares (OUSM) contains only 107 stocks. This significantly lower number of holdings allows for a more concentrated and potentially higher quality portfolio. The top three holdings in the fund include Tradeweb Markets, Juniper Networks, and Old Republic International, each accounting for roughly 2% of the fund’s total weight. Despite the broader market decline, shares of the small-cap fund have only decreased by 1.5% month-to-date, outperforming the Russell 2000 by more than 2 percentage points during this period.
The profitability issue within the Russell 2000 highlights the importance of selecting quality companies for investment. By shifting focus to more selective ETFs that prioritize dividends and growth, investors can potentially mitigate the negative impact of companies with negative earnings. The concentrated portfolio of such ETFs offers a promising alternative to the broader small-cap index, allowing for potentially better performance and reduced volatility.