Two Active Options to Play a Small Cap Comeback

Large cap equities have been leading the 2023 market rally with the S&P 500 up 15%, but at some point, small cap equities will follow suit. Here are a pair of active exchange traded fund (ETF) options worth considering to get exposure to a small cap rally.

Right now, the Russell 2000 index is up about 7% for the year, but as investors get more confirmation that the Fed will loosen monetary policy and avoid a recession, more market confidence could increase demand for small caps. That said, for broad exposure, consider the Avantis U.S Small Cap Equity ETF (AVSC).

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

In order to remain competitive with their passive fund counterparts, more active funds have been shifting to offer cost-effective solutions. AVSC is a prime example of this transition with its low 0.25% expense ratio.

Per its fund description, AVSC seeks long-term capital appreciation and invests primarily in a diverse group of U.S. small-cap companies across market sectors and industry groups, taking into consideration valuation, profitability, and levels of investment when selecting and weighting securities.

A Value-Oriented Option

For a more discerning screener that tilts towards the value factor, investors may want to consider exposure to the Avantis U.S. Small Cap Value ETF (AVUV). Per its basic fund description, AVUV 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 designed to increase expected returns by focusing on firms trading at low valuations with higher profitability ratios), the fund has just more than 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 hand pick holdings.

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