The Russell 2000, a small-cap index, has experienced a rollercoaster ride in the past few months. Despite a solid gain of 10.1% in July, the index has dropped approximately 4% in August. This volatility can be attributed to the overall composition of the index, with an alarming 40% of companies reporting negative earnings. This concerning statistic has led investors to question the profitability of their investments in the Russell 2000.
ALPS’ Paul Baiocchi, the firm’s chief ETF strategist, has raised concerns about the profitability drag within the Russell 2000. To combat this issue, Baiocchi suggests that investors focus on quality companies that prioritize dividends and exhibit less volatility compared to their peers. By investing in selective exchange-traded funds such as ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares (OUSM), investors can navigate the market more effectively and avoid the negative impact of unprofitable companies.
The ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares (OUSM) offers a unique investment strategy by only including 107 stocks, a stark contrast to the vast number of companies within the Russell 2000. This selective approach allows the fund to focus on quality over quantity, with top holdings including Tradeweb Markets, Juniper Networks, and Old Republic International. Despite a slight decrease of 1.5% month to date, the small-cap fund has outperformed the Russell 2000 by more than 2 percentage points, showcasing the benefits of investing in quality companies.
Addressing Long-Term Growth Concerns
For investors who have witnessed small caps stagnate over the past five years, a shift towards quality companies may provide a much-needed solution. By reallocating investments towards funds like OUSM, investors can position themselves for long-term growth and stability, mitigating the risks associated with unprofitable companies within the Russell 2000. Instead of passively accepting the ups and downs of the market, investors can take a proactive approach by prioritizing quality and sustainability in their investment portfolios.
The profitability concerns surrounding the Russell 2000 highlight the importance of quality over quantity in investment decisions. By focusing on companies that prioritize dividends, exhibit less volatility, and maintain profitable operations, investors can navigate the market more effectively and position themselves for long-term success. As the market continues to fluctuate, it is essential for investors to prioritize quality companies and avoid the pitfalls of unprofitable investments within the small-cap index.
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