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

The Invesco S&P SmallCap Quality ETF (XSHQ) launched on April 6, 2017, and offers investors a broad exposure to the small-cap blend segment of the market.

Understanding Smart Beta ETFs

In the world of exchange-traded funds (ETFs), traditional products typically track market capitalization-weighted indexes. Such strategies aim to reflect either specific segments of the market or the market as a whole. Market-cap weighted indexes are often favored by those who believe in market efficiency, offering a low-cost, straightforward, and transparent way to achieve market returns.

Conversely, there are investors who believe they can achieve better results than the market through careful stock selection. These investors may turn to another category of funds known as smart beta ETFs. These funds track non-cap weighted strategies and focus on choosing stocks that exhibit better risk-return characteristics based on specific fundamental metrics.

Investors in this space have various methodologies to consider, including equal-weighting, fundamental weighting, and volatility or momentum-based weighting. However, not all strategies guarantee superior returns.

About Invesco and the XSHQ Index

Invesco manages the XSHQ, which has accumulated approximately $407.34 million in assets, positioning it as a mid-sized ETF in the small-cap blend category. The fund aims to replicate the performance of the SmallCap 600 Quality Index, which comprises securities from the S&P SmallCap 600 Index with the highest quality scores. This quality score takes into account three main fundamental measures: return on equity, accruals ratio, and financial leverage ratio.

Costs and Expenses

When analyzing an ETF’s potential return, it’s crucial to consider its expense ratio. Over time, lower-cost funds have the potential to outperform those with higher fees if everything else remains constant. The XSHQ operates with an expense ratio of 0.29%, which is competitive with similar products in its category. Additionally, the fund offers a 12-month trailing dividend yield of 1.04%.

Sector Allocation and Key Holdings

Diversity in an ETF helps reduce the risk associated with individual stocks. Therefore, it's important to evaluate a fund's holdings prior to investing. The XSHQ ETF discloses its holdings daily, providing transparency for investors. The fund's largest allocation is in the Financials sector, accounting for roughly 27% of its portfolio, followed closely by Industrials and Consumer Discretionary sectors.

Among its main holdings, Mueller Industries Inc makes up about 4.14% of the fund’s total assets, with Jackson Financial Inc and Armstrong World Industries Inc following behind. The top 10 holdings in XSHQ constitute approximately 23.59% of its total assets.

Performance and Risk Assessment

As of December 6, 2024, XSHQ has recorded a year-to-date performance increase of about 17% and has gained around 26.20% during the last year. Throughout the past year, the fund's prices have fluctuated between $37.15 and $47.59.

The ETF bears a beta of 0.98 and a standard deviation of 21.65% for the past three years, signifying its effective diversification of company-specific risks with approximately 117 different holdings.

Other Options

While the Invesco S&P SmallCap Quality ETF is an appealing choice for those looking to excel within the small-cap blend space, investors might want to explore alternative ETFs as well. Options like the iShares Russell 2000 ETF (IWM) and the iShares Core S&P Small-Cap ETF (IJR) offer additional avenues. The iShares Russell 2000 ETF manages assets worth $81.89 billion, while the iShares Core S&P Small-Cap ETF has $93.89 billion in assets. In addition, IWM charges an expense ratio of 0.19%, while IJR has an even lower ratio at 0.06%.

For those seeking lower-cost and less risky alternatives, traditional market capitalization-weighted ETFs that aim to match the returns of the small-cap blend category could be viable options.

Conclusion

To further investigate this product and explore other ETFs that align with your investment goals, consider performing detailed screenings and staying updated on the latest trends in the ETF market.

ETF, Investment, Stocks