The Russell 2000: A Deep Dive into Profitability Issues

The Russell 2000 index experienced a significant uptick of 10.1% in July, only to plummet by approximately 4% in August, according to recent data. This rollercoaster ride in performance has left investors wondering about the underlying reasons behind such erratic movements. ALPS’ Paul Baiocchi attributes the volatility to the composition of the index, highlighting a concerning statistic by Apollo Global that reveals 40% of companies within the Russell 2000 have negative earnings.

Quality over Quantity

In light of the profitability concerns surrounding the Russell 2000, Baiocchi recommends that investors shift their focus towards quality companies to mitigate the drag on returns. By opting for more selective exchange-traded funds such as the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares (OUSM), investors can target companies that not only demonstrate stable dividend payments and growth but also exhibit lower volatility compared to their peers. This strategic move allows advisors and investors alike to reallocate their capital to a sector that has previously underperformed for the past five years.

The Fund’s Composition

Unlike the Russell 2000, which encompasses a vast array of stocks, the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF Shares (OUSM) prides itself on a concentrated portfolio of just 107 stocks. This leaner approach enables the fund to focus on quality over quantity, with its top three holdings including Tradeweb Markets, Juniper Networks, and Old Republic International – each accounting for approximately 2% of the portfolio, as per FactSet data. Despite the recent market turbulence, shares of the small-cap fund have only dipped by 1.5% month to date, showcasing its resilience and outperformance relative to the Russell 2000 by more than 2 percentage points during this period.

By reevaluating their investment strategies and opting for quality over sheer quantity, investors can potentially navigate the profitability challenges plaguing the Russell 2000 index. With the right approach and a carefully curated portfolio of quality companies, investors can position themselves for long-term success in the small-cap space.