Small Cap Equities Offering Value Compared to Large Cap Peers

Large cap dominance was the highlight of the 2023 market rally, but small cap equities could pick up where their large cap counterparts left off for the remainder of 2024. That said, it could be an opportune time to reap the value of investing in small cap equities with a pair of exchange traded fund (ETF) options from Avantis.

When markets trend higher, small caps could make a more pronounced move to the upside, especially if 2024 turns out to be an extension of 2023’s market rally. The capital markets are widely expecting the Federal Reserve to cut rates. So from a fundamental perspective, this could also help alleviate borrowing costs for small cap companies that need to refinance existing debt or borrow additional capital to expand.

Indeed, the 2023 performance charts of both the S&P 500 and Russell 2000 shows the former outdoing its small cap brethren. However, with the notion that rate cuts may have already been priced into 2023’s market rally, it could be small cap equities that are offering the better value between the two.

“Small caps relative to the S&P 500 on a price-to-book basis is back to where it was in 1999, which was the absolute low and was a launch point of 12 years of outperformance for small caps,” said Fundstrat’s Tom Lee.

IWM Chart

IWM data by YCharts

To take advantage of the current value small caps offer, consider the Avantis U.S Small Cap Equity ETF (AVSC). The deeply diversified fund uses active management, giving it the flexibility to change holdings when market conditions warrant an adjustment.

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

2 International Small Cap Options

The availability of small cap opportunities exhibiting value isn’t relegated to just the United States. International small cap companies are also offering value, and bargain hunters are taking advantage of the opportunity.

With a relatively low expense ratio of just 0.30%, investors wanting to get small cap exposure abroad can look to another deeply diversified, active fund. That’s the Avantis International Equity Small Cap ETF (AVDS). It invests in a broad set of non-U.S. small cap companies, taking into consideration valuation, profitability, and levels of investment when selecting and weighting securities.

Emerging markets can offer the potential for additional future upside if investors are willing to take on more risk. If so, they may want to consider the actively managed Avantis Emerging Markets Small Cap Equity ETF (AVEE), which carries an expense ratio of 0.42%.

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