The Russell 2000 Index experienced a significant gain of 10.1% in July, only to plummet by roughly 4% in August. This rollercoaster performance has left investors puzzled and concerned about the profitability of companies within the index. According to ALPS’ Paul Baiocchi, the erratic movements can be attributed to the overall composition of the index, with an alarming estimate from Apollo Global revealing that 40% of the companies included in the Russell 2000 have negative earnings.
In light of the profitability challenges plaguing the Russell 2000, investors are urged to prioritize quality over quantity when selecting companies to invest in. Baiocchi recommends focusing on quality companies that pay and grow dividends while exhibiting lower volatility compared to their peers. One solution he proposes is to explore more selective exchange-traded funds like the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares (OUSM). By adopting this approach, advisors and investors can navigate the stagnant performance of small caps over the past five years by allocating their investments to a category that has shown promise.
Unlike the extensive list of stocks included in the Russell 2000, the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares (OUSM) holds just 107 carefully curated stocks. This selectivity ensures a higher caliber of companies within the fund, leading to a more stable and potentially profitable investment. The top three holdings of the fund, including Tradeweb Markets, Juniper Networks, and Old Republic International, each hold a significant weight of roughly 2% in the portfolio. Despite the challenging market conditions, shares of the small-cap fund have only dipped by 1.5% month-to-date, showcasing a commendable outperformance compared to the Russell 2000.
The profitability issue within the Russell 2000 Index serves as a wake-up call for investors to reevaluate their investment strategies. By emphasizing quality over quantity and exploring more selective investment options like the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares (OUSM), investors can mitigate the risks associated with underperforming companies and navigate the volatile market landscape with prudence and foresight.
Leave a Reply