Is Invesco S&P SmallCap Quality ETF (XSHQ) a Strong ETF Right Now?

Launched on 04/06/2017, the Invesco S&P SmallCap Quality ETF (XSHQ) offers investors a way to diversify within the small-cap blend market. As a smart beta ETF, it provides a distinct method of investment by focusing on quality stocks within a specific index.

Understanding Smart Beta ETFs

Typically, ETFs have relied on market capitalization (cap) weighted indexes. These products aim to reflect the performance of a particular market segment around efficiency and are straightforward for investors who prefer to replicate market returns. However, many investors think they can achieve better results through intelligent stock selection. This is where smart beta comes into play.

Smart beta ETFs track indexes that do not use market cap as their sole criterion. Instead, they utilize fundamental characteristics to identify stocks that are likely to provide better risk-return outcomes. Common methods include equal-weighting, fundamental weighting, and volatility/momentum strategies. However, not all smart beta strategies have been proven to provide above-average returns consistently.

The Fund Sponsor and Its Index

Administered by Invesco, the XSHQ has gathered over $407.34 million in assets, making it a mid-sized option in the small-cap blend category. Its goal is to mirror the performance of the S&P SmallCap 600 Quality Index, which is comprised of 120 high-quality stocks selected from the S&P SmallCap 600 Index based on their quality scores. These scores take into account three fundamental measures: return on equity, accruals ratio, and financial leverage ratio.

Cost and Expenses

When evaluating an ETF's potential total return, expenses play a critical role. Generally, lower expense ratios can lead to superior long-term performance when other conditions are equal. The XSHQ features an annual operating expense of 0.29%, which positions it competitively among similar products. Additionally, it offers a 12-month trailing dividend yield of 1.04%.

Sector Breakdown and Top Holdings

ETFs are known for their ability to provide diversified exposure, thus reducing individual stock risk. However, it is crucial to examine the fund's holdings. XSHQ allocates approximately 27% of its assets to the Financials sector, followed closely by Industrials and Consumer Discretionary sectors.

Among its holdings, Mueller Industries Inc (MLI) constitutes about 4.14% of the fund, followed by Jackson Financial Inc (JXN) and Armstrong World Industries Inc (AWI). The top ten holdings make up approximately 23.59% of the fund's overall assets.

Performance and Risk Assessment

This year, the XSHQ has reported a return of around 17%, with a notable increase of about 26.20% over the last year, as of 12/06/2024. Over the past 52 weeks, the fund’s trading range has been between $37.15 and $47.59.

The XSHQ has a beta of 0.98 and a standard deviation of 21.65% over the trailing three years. With roughly 117 holdings, it effectively mitigates company-specific risk in its portfolio.

Alternatives to Consider

While the Invesco S&P SmallCap Quality ETF is a suitable option for those looking to outperform the small-cap blend section, several alternatives are available. The IShares Russell 2000 ETF (IWM) and IShares Core S&P Small-Cap ETF (IJR) are two noteworthy options. IWM, which tracks the Russell 2000 Index, boasts assets of $81.89 billion, whereas IJR, following the S&P SmallCap 600 Index, has $93.89 billion. The expense ratios for these alternatives are 0.19% for IWM and 0.06% for IJR.

Investors seeking cost-effective and potentially lower-risk options may prefer traditional market-cap weighted ETFs aimed at mirroring the small-cap blend market returns.

Conclusion

In summary, the Invesco S&P SmallCap Quality ETF (XSHQ) presents an interesting opportunity for those aiming to gain exposure within the small-cap blend category while focusing on quality stocks. However, investors should explore all options and evaluate their investment goals before making a decision.

ETF, Investing, Finance