The Russell 2000 index has been experiencing some volatility recently, with a 10.1% gain in July followed by a 4% drop in August. According to ALPS’ Paul Baiocchi, this turbulence can be attributed to the overall composition of the index. Apollo Global estimates that 40% of the companies in the Russell 2000 have negative earnings. This has led investors to accept the fact that being in the Russell 2000 means dealing with both the good and the bad.
To overcome the profitability drag in the Russell 2000, Baiocchi suggests that investors focus on quality companies. He recommends looking into more selective exchange-traded funds, such as ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares (OUSM). These funds consist of quality companies that not only pay and grow their dividends but also exhibit less volatility compared to their peers. This strategy allows advisors and investors who have witnessed small caps underperforming for the past five years to be part of a category that has lagged.
Apart from its profitability screen, the fund holds just 107 stocks, which is a fraction of what is included in the Russell 2000. Among its top three holdings are Tradeweb Markets, Juniper Networks, and Old Republic International, each accounting for approximately a 2% weighting in the fund according to FactSet. Despite the market conditions, shares of the small-cap fund have only declined by 1.5% month to date, outperforming the Russell 2000 by more than 2 percentage points during this period.
The profitability issue in the Russell 2000 is a cause for concern for investors. It is essential to prioritize quality companies to mitigate the impact of negative earnings. By choosing more selective ETFs like ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares, investors can position themselves in a category that offers stability and growth potential. It is crucial to keep a close eye on the composition of investment portfolios and make adjustments to ensure long-term success in the market.
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