this Russell 2000 Profitability issues may arise.
While the small-cap index gained 10.1% in July, it was down about 4% so far in August as of Thursday morning.
ALPS's Paul Baiocchi attributes the volatility moves to the index's overall composition, Apollo Global estimates show 40% of companies have negative profits.
“(Investors) have basically accepted the fact that by joining the Russell 2000, I'm going to have to take the good with the bad,” the firm's chief ETF strategist told CNBC's “ETF Edge” this week.
To avoid a drag on profitability, Baiocchi recommends investors prioritize quality companies to focus on more selective exchange-traded funds, such as his firm's ALPS O'Shares U.S. Small Cap Quality Dividend ETF Stock (OUSM).
“The idea is that quality companies are able to pay and grow dividends and, importantly, are less volatile than their peers,” he said. “It allows advisors and investors who have seen small caps trade sideways for five years to be allocated to the backward category.”
Excluding the profitability screen, the fund contains just 107 stocks – a fraction of the Russell 2000 stocks. Tradeweb Market, Juniper Networks and old republic internationalEach fund has a weight in the fund of about 2%, according to FactSet.
The small-cap fund's shares are down 1.5% so far this month, outperforming the Russell index by more than 2 percentage points over the same period.
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