With risk-off sentiment permeating markets, investors may not be rushing to consider small-cap stocks and the related exchange traded funds.
Conversely, this could prove to be the opportune time to evaluate small-cap ETFs, including new additions to that landscape such as the Avantis U.S. Small Cap Equity ETF (NYSE Arca AVSC).
AVSC debuted in January and attempts to outperform the widely followed Russell 2000 Index.
“Investors gravitate to small-company stocks for a couple of reasons. Some want a small dose of small companies in their portfolios to round out their exposure to the large-company stocks that dominate the market,” says Morningstar’s Susan Dziubinski. “Other investors may want to tilt their portfolios toward small caps after a period of large-cap outperformance, such as we’ve seen during the past several years.”
Home to nearly 1,100 stocks, AVSC is actively managed, and that could be a benefit because small-caps are a territory in which some active managers deliver the goods for investors.
“The small-cap part of the market is an area where some active managers have been able to add value versus their respective indexes,” adds Dziubinski.
On that note, another perk associated with AVSC is that it’s an ETF. That’s relevant because many of the actively managed small-cap mutual funds commanding “gold” ratings from Morningstar are closed to new investors. ETFs, on the other hand, never close to new investors.
Additionally, AVSC charges just 0.25% per year, or $25 on a $10,000 investment. That’s cost-effective relative to the broader universe of actively managed small-cap equity funds. Additionally, ETFs are more tax-efficient than mutual funds, which is an important trait when considering that turnover ratios on small-cap funds can skew to the high side.
Another point in favor of the ETF structure as it pertains to AVSC is that many rival active mutual funds require minimum investments. That’s never the case with an ETF.
“This strategy leans toward smaller, more value-oriented companies than its average peer in the Small Blend Morningstar Category. Analyzing additional factors, this strategy tilts toward highly liquid stocks, demonstrated by holding companies with relatively higher trading volumes. This gives the managers flexibility during bear markets to sell without adversely affecting prices,” says Morningstar of AVSC.
AVSC allocates about half of its weight to financial services, industrial, and consumer cyclical stocks.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.