The Russell 2000 index has experienced significant volatility recently, with a 4% drop in August following a 10.1% gain in July. The erratic movements can be attributed to the composition of the index, with Apollo Global estimating that 40% of the companies included have negative earnings. This has raised concerns among investors about the overall profitability of the index.
In light of the profitability issues plaguing the Russell 2000, investors are advised to prioritize quality companies. ALPS’ Paul Baiocchi suggests looking at more selective exchange-traded funds that focus on quality companies with strong fundamentals. By investing in companies that pay and grow their dividends, investors can potentially avoid the volatility associated with lower quality small-cap stocks.
One such fund that emphasizes quality over quantity is the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares (OUSM). This fund contains just 107 stocks, a fraction of what is included in the Russell 2000. With top holdings such as Tradeweb Markets, Juniper Networks, and Old Republic International, OUSM offers exposure to quality small-cap companies with a focus on dividends and low volatility.
Despite the recent market volatility, shares of the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares have outperformed the Russell 2000 index. While the small-cap fund is down 1.5% month to date, it has outperformed the Russell by more than 2 percentage points during the same period. This demonstrates the potential benefits of prioritizing quality companies over the broader small-cap index.
The Russell 2000 index faces profitability challenges due to the high percentage of companies with negative earnings. Investors looking to mitigate this risk may consider investing in more selective ETFs that focus on quality small-cap companies with strong fundamentals. By prioritizing quality over quantity, investors can potentially navigate the volatile small-cap market more effectively and achieve better long-term returns.