Small-Cap Equities Currently Offering Exceptional Value

As investors shore up their portfolios ahead of 2024, they may want to consider small-cap equities. That area could be presenting an exceptional value proposition that could prosper next year.

Large-cap dominance could be giving way to small cap-outperformance. This is due to risk-on sentiment permeating the capital markets in anticipation of fewer rate hikes. The recent pause by the Federal Reserve could be an early sign that rate cuts could be happening in 2024. That could be a boon for small-cap upside. If that’s the case, investors may want to take advantage of the current prices.

“From a valuation standpoint, small-cap value shares are far and away the cheapest U.S. stocks,” a Barron’s article said. That article noted that even though “large-cap growth shares (led by the Magnificent Seven group of tech stocks) are trading 36% above their 20-year average price/earnings multiple, JP Morgan reports that small-cap value is selling 14% below its 20-year average.”

It could also be a simple case of market physics. That’s because inflation and high interest rates have been applying pressure on small-caps the last few years. The Russell 2000 has been feeling the pangs of a bear market. But the tide could be turning. So investors may want exposure with ETFs like the Avantis U.S Small Cap Equity ETF (AVSC).

With over 1,300 holdings (as of September 30), the deeply diversified AVSC avoids over-concentration in its broad portfolio. Its active management component allows it the flexibility to change holdings when market conditions warrant an adjustment.

To remain competitive with passive fund counterparts, more active funds have been offering more cost-effective solutions. AVSC is a prime example, with its low 0.25% expense ratio.

The ETF seeks long-term capital appreciation and invests primarily in a diverse group of U.S. small-cap companies across market sectors and industry groups. It takes into consideration valuation, profitability, and levels of investment when selecting and weighting securities.

A Discerning Small-Cap ETF

Investors who want an even more discerning value screener in the small-cap market may want to look at the Avantis U.S. Small Cap Value ETF (AVUV). It seeks long-term capital appreciation, investing in primarily a diverse group of U.S. small-cap companies across market sectors and industry groups.

Like AVSC, this fund also features a low 0.25% expense ratio that can compete with passive funds. The active component still allows for AVUV to be pliable with the current market environment as well as when conditions change in the future.

Because the fund has a more discerning value screener (small-cap companies are designed to increase expected returns by focusing on firms trading at low valuations with higher profitability ratios), the fund has just over half of the holdings of AVSC). Nonetheless, it’s still an ideal way to invest in the vast universe of small-cap companies while allowing for a value factor strategy to handpick holdings.

For more news, information, and analysis, visit the Core Strategies Channel.