Evaluating the Strength of Invesco S&P SmallCap Quality ETF (XSHQ)

Invesco S&P SmallCap Quality ETF (XSHQ) was launched on April 6, 2017, and it aims to provide investors with broad exposure to the Small Cap Blend segment of the market. This exchange-traded fund (ETF) is part of the growing category of smart beta funds, which differ from traditional market-cap weighted ETFs.

Understanding Smart Beta ETFs

Traditionally, the ETF market has largely been dominated by products that are based on market cap weighted indexes. These strategies seek to reflect either a specific market segment or the overall market. They can be an effective choice for investors who trust that the market is efficient, as they provide a low-cost, transparent means of accessing market returns.

However, some investors believe they can achieve better returns through strategic stock selection, prompting the development of non-cap weighted ETFs—commonly referred to as smart beta. These funds aim to select stocks that exhibit potential for superior risk-return profiles based on specific fundamental metrics or a combination of factors.

Among the methodologies available in the smart beta space are equal weighting, fundamental weighting, and volatility/momentum-based weighting. Each strategy offers unique advantages, but performance can vary.

Fund Overview and Management

The Invesco S&P SmallCap Quality ETF is managed by Invesco and has accumulated over $407 million in assets under management, positioning it as a mid-sized entity within its category. XSHQ seeks to replicate the performance of the SmallCap 600 Quality Index, reflecting before fees and expenses.

The SmallCap 600 Quality Index is made up of 120 stocks from the S&P SmallCap 600 Index, specifically those that score highest in quality based on three important financial metrics: return on equity, accruals ratio, and financial leverage ratio.

Cost Efficiency and Dividends

When it comes to assessing an ETF's potential return, the expense ratio is a critical factor. Lower-cost ETFs often outperform their higher-cost counterparts over time, all else being equal. For XSHQ, the annual operating expense is 0.29%, which is competitive compared to others in its category.

This fund currently offers a trailing 12-month dividend yield of 1.04%, which can be attractive for income-seeking investors.

Sector Allocation and Key Holdings

Diversification is one of the primary benefits of ETFs, allowing investors to reduce the risk associated with individual stocks. XSHQ provides this benefit, disclosing its holdings transparently.

The ETF's largest sector allocation is in Financials, which constitutes about 27% of its total portfolio. This is followed by significant holdings in the Industrials and Consumer Discretionary sectors.

Among its individual holdings, Mueller Industries Inc (MLI) represents approximately 4.14% of the fund's assets, followed by Jackson Financial Inc (JXN) and Armstrong World Industries Inc (AWI). Together, the top ten holdings comprise about 23.59% of total assets.

Performance Metrics and Risk Assessment

As of the latest reports, XSHQ has performed well, gaining around 17% year-to-date and approximately 26.20% over the trailing year. Over the last 52 weeks, the fund's share price fluctuated between $37.15 and $47.59.

In terms of risk, XSHQ has a beta of 0.98, indicating it's slightly less volatile than the market. Its standard deviation over the past three years is 21.65%, which reflects the volatility of its returns. The fund has around 117 total holdings, providing a level of diversification that helps mitigate company-specific risks.

Alternative Investment Options

For investors considering allocations outside of the Invesco S&P SmallCap Quality ETF, there are several other ETFs worth exploring. Two notable alternatives are the iShares Russell 2000 ETF (IWM), which tracks the Russell 2000 Index, and the iShares Core S&P Small-Cap ETF (IJR), which follows the S&P SmallCap 600 Index. IWM boasts assets of $81.89 billion, while IJR has $93.89 billion in assets. Moreover, IWM charges an expense ratio of 0.19%, whereas IJR has a lower fee of 0.06%.

For those on the lookout for cost-effective options with lower associated risks, traditional market cap weighted ETFs may prove to be a viable choice that also aims to replicate returns in the Small Cap Blend segment.

Conclusion

The Invesco S&P SmallCap Quality ETF (XSHQ) showcases solid performance and attractive characteristics, appealing to those interested in the small-cap market segment. Nonetheless, investors should consider their individual objectives and compare it with other available products to make informed investment decisions.

ETF, Investment, Finance