Evaluating the Invesco S&P SmallCap Quality ETF (XSHQ): A Strong Investment Option?

Launched on April 6, 2017, the Invesco S&P SmallCap Quality ETF (XSHQ) is a smart beta exchange-traded fund that provides investors with exposure to the small-cap blend category of the market.

Understanding Smart Beta ETFs

Traditional ETFs often rely on market-cap weighted indexes, which aim to represent a segment of the market or the market as a whole. These funds are generally suitable for investors who trust in market efficiency as they offer a cost-effective and transparent method to replicate market returns.

In contrast, smart beta ETFs attract those who believe they can outperform the market through superior stock selection. These funds track indexes that do not rely solely on market capitalization, focusing instead on stocks that exhibit certain fundamental qualities.

Smart beta strategies may include methodologies such as equal weighting, fundamental weighting, and factors like volatility or momentum. However, not all approaches guarantee enhanced returns.

Fund Details and Management

Invesco manages XSHQ, which has grown to over $407.34 million in assets, ranking it among the average-sized ETFs in its category. The ETF is designed to replicate the performance of the S&P SmallCap 600 Quality Index prior to fees and expenses.

The S&P SmallCap 600 Quality Index comprises 120 securities from the S&P SmallCap 600 Index that hold the highest quality scores, derived from three fundamental measures: return on equity, the accruals ratio, and the financial leverage ratio.

Categorizing Costs and Expenses

When evaluating an ETF's overall return, it's crucial to consider its expense ratios. XSHQ features an annual operating expense of 0.29%, which is competitive relative to other funds in the small-cap blend space.

Additionally, the fund currently offers a 12-month trailing dividend yield of 1.04%, appealing to income-focused investors.

Sector Diversification and Key Holdings

One benefit of ETFs is their potential for diversification, thereby reducing the risks associated with individual stocks. XSHQ allocates the largest portion of its investments—around 27%—to the Financials sector, followed by sectors like Industrials and Consumer Discretionary.

Among its holdings, Mueller Industries Inc (MLI) is the largest, representing approximately 4.14% of the total assets. Other significant holdings include Jackson Financial Inc (JXN) and Armstrong World Industries Inc (AWI). Collectively, the top ten holdings make up about 23.59% of the fund's total assets.

Performance Metrics and Risk Assessments

In the current year, XSHQ has experienced an increase of about 17%, with a year-to-date rise of roughly 26.20% as of December 6, 2024. Over the past 52 weeks, the fund's price has fluctuated between $37.15 and $47.59.

With a beta of 0.98 and a standard deviation of 21.65% over the trailing three years, XSHQ effectively manages company-specific risk through its diversification across approximately 117 holdings.

Exploring Alternatives to XSHQ

While the Invesco S&P SmallCap Quality ETF is a viable option for those looking to surpass the performance of the small-cap blend category, several alternatives exist within this sector.

Investors might consider the IShares Russell 2000 ETF (IWM), which follows the Russell 2000 Index, or the iShares Core S&P Small-Cap ETF (IJR), which tracks the S&P SmallCap 600 Index. The IWM boasts an asset base of $81.89 billion, while the IJR has $93.89 billion. Notably, IWM comes with an expense ratio of 0.19% and IJR offers a lower 0.06% fee.

For those prioritizing lower costs and reduced risk, traditional market-cap weighted ETFs that aim to replicate the returns of the small-cap blend segment may be appealing.

Conclusion

In summary, the Invesco S&P SmallCap Quality ETF presents a solid investment opportunity for those focused on the small-cap sector. Investors should continue to analyze their investment goals and explore various options to find the best fit for their portfolios.

ETF, Investment, Finance