The recent performance of the Russell 2000 index has raised concerns about its profitability. Despite gaining 10.1% in July, the index has dropped around 4% in August. ALPS’ Paul Baiocchi attributes these volatile movements to the composition of the index, with an estimated 40% of companies having negative earnings. This has led investors to accept the ups and downs of being invested in the Russell 2000.
To avoid the drag on profitability, Baiocchi recommends that investors focus on quality companies. He suggests looking into more selective exchange-traded funds such as the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares (OUSM). This approach emphasizes investing in companies that pay and grow dividends, while having lower volatility compared to their peers. By prioritizing quality, investors can potentially achieve better returns and minimize risks associated with negative earnings.
The ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares (OUSM) stands out for its profitability screen and focused portfolio. With only 107 stocks included in the fund, it offers a more concentrated approach compared to the Russell 2000. The top three holdings in the fund are Tradeweb Markets, Juniper Networks, and Old Republic International, each holding roughly a 2% weighting. Despite the broader market challenges, shares of this small-cap fund have performed relatively well, down only 1.5% month-to-date and outperforming the Russell 2000 by over 2 percentage points in that period.
The Russell 2000’s profitability concerns highlight the importance of selecting quality companies for investment. By focusing on companies with strong dividend growth, lower volatility, and solid earnings, investors can potentially navigate market volatility and enhance their overall returns. The ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares (OUSM) presents an opportunity for investors to access a focused portfolio of quality small-cap companies, offering a potential solution to the profitability challenges faced by the broader market indices.