The Russell 2000 index has been facing a profitability problem recently. While the index saw a 10.1% increase in July, it has since dropped by approximately 4% in August. This volatility in the small-cap index can be attributed to the composition of the companies within it. According to estimates from Apollo Global, 40% of the companies in the Russell 2000 have negative earnings. This lack of profitability is causing concern among investors.
To address the profitability drag in the Russell 2000, investors are advised to prioritize quality companies. ALPS’ Paul Baiocchi suggests looking into more selective exchange-traded funds, such as the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares (OUSM). This fund focuses on quality companies that pay and grow their dividends, while also exhibiting less volatility compared to their peers.
The ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares (OUSM) contains just 107 stocks, a significantly lower number compared to the Russell 2000. This selective approach allows the fund to focus on quality over quantity. Additionally, the fund’s top three holdings include Tradeweb Markets, Juniper Networks, and Old Republic International, each with a roughly 2% weighting in the fund.
Despite the challenges faced by the Russell 2000, the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares (OUSM) has been performing relatively well. While the small-cap fund is down by 1.5% month-to-date, it has outperformed the Russell 2000 by more than 2 percentage points in that same period. This performance highlights the importance of investing in quality companies, especially in volatile market conditions.
Overall, the profitability concerns within the Russell 2000 index serve as a cautionary tale for investors. By prioritizing quality companies and choosing selective investment options, investors can navigate the challenges posed by negative earnings and volatility. The performance of the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares (OUSM) showcases the benefits of such an approach, emphasizing the importance of due diligence and careful selection in the world of small-cap investing.