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

The Invesco S&P SmallCap Quality ETF (XSHQ - Free Report) was launched on April 6, 2017. This exchange-traded fund aims to provide broad exposure to the Small Cap Blend sector of the U.S. equity market.

Sponsored by Invesco, this ETF has gathered assets totaling approximately $396.76 million, placing it among the average-sized ETFs that aspire to reflect the Small Cap Blend segment of the U.S. equity landscape.

Why Consider Small Cap Blend?

Small cap companies, defined as those with a market capitalization below $2 billion, are often viewed as having high growth potential compared to their large and mid-cap counterparts; however, they also carry greater risk.

Blend ETFs typically hold a combination of growth and value stocks, as well as those exhibiting characteristics of both. This makes them appealing to investors looking for a balanced investment approach.

Understanding Costs

When evaluating an ETF, it's essential to consider its expense ratio, as lower-cost options generally yield better net returns if all other metrics are equal.

The Invesco S&P SmallCap Quality ETF has an annual operating expense of 0.29%, which is quite competitive within its peer group.

Additionally, it offers a 12-month trailing dividend yield of 1.02%, providing investors with a bit of income along with their potential capital gains.

Sector Exposure and Leading Holdings

Although ETFs inherently provide diversified exposure, effectively lowering single-stock risk, it remains crucial to examine the fund's holdings prior to investment. Fortunately, many ETFs regularly disclose their holdings, which is essential for investors.

The Invesco S&P SmallCap Quality ETF predominantly invests in the Financials sector, allocating about 27.20% of its portfolio there. The next largest sectors are Industrials and Consumer Discretionary.

In terms of individual stocks, Mueller Industries Inc (MLI - Free Report) represents approximately 4.14% of total assets. Other significant holdings include Jackson Financial Inc (JXN - Free Report) and Armstrong World Industries Inc (AWI - Free Report). The top ten holdings together account for around 23.59% of the ETF’s total assets under management.

Performance and Risk Assessment

XSHQ operates with the goal of matching the performance of the SmallCap 600 Quality Index before factoring in fees and expenses. This index includes 120 securities from the S&P SmallCap 600 Index that achieve the highest quality scores, based on three fundamental measures: return on equity, accruals ratio, and financial leverage ratio.

Performance has been promising, as the ETF has gained approximately 18.98% year-to-date, with a total increase of about 30.03% over the past year (as of November 27, 2024). Throughout the last 52 weeks, it has seen a trading range between $36.10 and $47.59.

Examining the risk profile, the ETF has a beta of 0.96 and a standard deviation of 21.76% over the trailing three-year period. With around 117 holdings, it successfully diversifies company-specific risks.

Considering Alternatives

With a Zacks ETF Rank of 3 (Hold), Invesco S&P SmallCap Quality ETF stands as a reasonable choice for those worried about positioning in the Small Cap Blend market segment. Nonetheless, investors should evaluate other options in this area as well.

Investors might look into the iShares Russell 2000 ETF (IWM - Free Report) and the iShares Core S&P Small-Cap ETF (IJR - Free Report), both of which aim to track analogous indices. While the iShares Russell 2000 ETF has amassed $79.47 billion in assets, the iShares Core S&P Small-Cap ETF totals $94.47 billion. The expense ratio for IWM is 0.19%, whereas IJR charges only 0.06%, making them appealing lower-cost options.

Final Thoughts

Passively managed ETFs, like XSHQ, are gaining traction among retail and institutional investors alike due to their affordability, transparency, flexibility, and tax efficiency. They serve as excellent vehicles for long-term investment strategies.

For those interested in exploring this ETF and others, it's advisable to filter products that align with your investment goals and stay informed about the latest trends in the ETF market.

ETF, Investment, Performance