Should Invesco S&P SmallCap Quality ETF (XSHQ) Be on Your Investing Radar?

The Invesco S&P SmallCap Quality ETF (XSHQ) was established on April 6, 2017. It is a passively managed exchange-traded fund that aims to provide extensive exposure to the Small Cap Blend section of the U.S. equity market.

This fund is managed by Invesco and has accumulated an asset base exceeding $396.76 million, positioning it as one of the medium-sized ETFs targeting the Small Cap Blend market in the U.S.

Why Invest in Small Cap Blend?

Small cap companies, with market capitalizations under $2 billion, usually present greater growth opportunities compared to larger firms, although they also come with increased risk. The blend category typically includes a combination of growth and value stocks, capturing a diverse range of investment styles.

Cost Considerations

When evaluating an ETF, one important factor to consider is its expense ratio. Generally, lower-cost ETFs yield better returns than their higher-cost counterparts, all other factors being equal. The Invesco S&P SmallCap Quality ETF has an annual expense ratio of 0.29%, which is competitive within its peer group. Additionally, it provides a 12-month trailing dividend yield of 1.02%.

Portfolio Composition and Key Holdings

While ETFs offer diversified exposure that helps reduce the risks associated with individual stocks, it's wise to consider an ETF's holdings prior to investment. Fortunately, most ETFs disclose their portfolios daily. This ETF allocates about 27.20% of its assets to the Financials sector, followed by significant portions in Industrials and Consumer Discretionary sectors.

Among its top holdings, Mueller Industries Inc. constitutes approximately 4.14% of total assets. Other significant holdings include Jackson Financial Inc. and Armstrong World Industries Inc. The ten largest holdings in this ETF make up about 23.59% of its total assets.

Performance Metrics and Risks

The XSHQ ETF aims to replicate the performance of the S&P SmallCap 600 Quality Index before deducting fees and expenses. This index consists of 120 securities from the S&P SmallCap 600 Index that exhibit the highest quality scores, determined by three key financial metrics: return on equity, accruals ratio, and financial leverage ratio.

As of November 27, 2024, the ETF has increased by approximately 18.98% this year and experienced a growth of about 30.03% over the past year. During the last 52 weeks, the fund’s trading range has varied between $36.10 and $47.59.

The ETF's beta is 0.96, and it has a standard deviation of 21.76% over the trailing three-year period, which indicates that it effectively mitigates risk through diversification, holding about 117 different securities.

Alternative Investment Options

The Invesco S&P SmallCap Quality ETF holds a Zacks ETF Rank of 3 (Hold). This ranking is based on anticipated returns for its asset class, its expense ratio, and momentum indicators, making XSHQ a viable choice for investors looking at the Small Cap Blend market segment. There are also alternative ETFs worth considering, like the iShares Russell 2000 ETF (IWM) and the iShares Core S&P Small-Cap ETF (IJR). The iShares Russell 2000 ETF controls assets valued at $79.47 billion, while iShares Core S&P Small-Cap ETF manages $94.47 billion. The expense ratios for these ETFs are 0.19% and 0.06% respectively.

Conclusion

Passively managed ETFs are increasingly popular among both retail and institutional investors due to their low costs, transparency, flexibility, and tax efficiency. They serve as excellent investment vehicles, particularly for long-term investors seeking to build wealth.

For further insights into this product and others, consider matching your investment objectives with the right ETFs and staying informed about the latest developments in the ETF investment landscape.

Investing, ETF, Finance