The Russell 2000 index experienced a significant gain of 10.1% in July but faced a decline of approximately 4% in August. This erratic behavior has raised concerns about the overall profitability of the small-cap index. According to ALPS’ Paul Baiocchi, a substantial portion of companies included in the index are reporting negative earnings, with estimates suggesting that as much as 40% of them fall into this category. This trend has prompted investors to accept the volatility associated with the Russell 2000, acknowledging that both positive and negative outcomes are part of the package.
In light of the profitability challenges observed in the Russell 2000, investors are urged to prioritize quality when selecting companies to invest in. Baiocchi recommends focusing on quality companies that exhibit steady dividend payouts and growth while maintaining lower volatility compared to their peers. By emphasizing quality, investors can potentially mitigate the risks associated with underperforming small-cap stocks. One example of a more selective exchange-traded fund that aligns with this strategy is the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares (OUSM).
The ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares (OUSM) stands out for its emphasis on quality and selectivity. With only 107 stocks included in the fund, a fraction of what is found in the Russell 2000, OUSM offers a more concentrated portfolio of companies. The top three holdings of the fund – Tradeweb Markets, Juniper Networks, and Old Republic International – each hold a roughly 2% weighting in the fund, according to FactSet. Despite a month-to-date decline of 1.5%, the small-cap fund has outperformed the Russell 2000 by more than 2 percentage points during this period.
The profitability concerns and volatility within the Russell 2000 highlight the importance of quality and selectivity in small-cap investments. By focusing on companies with strong dividend growth, lower volatility, and a more concentrated portfolio, investors can potentially navigate the challenges posed by underperforming small-cap stocks. The ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares (OUSM) serves as an example of how prioritizing quality can lead to more stable and potentially lucrative investment outcomes in the small-cap market.