Small-company stocks have been thriving as the U.S. economy gradually bounces back from the impact of the Covid-triggered recession. However, investors may notice a significant range of returns within their portfolios.
Varied Returns Among Small-Cap Funds
Year to date, returns for nearly 600 small-cap funds have spanned from a 5% loss to an impressive 65% gain. Interestingly, active managers have experienced particularly strong performance this year, with about two-thirds of small-cap active funds outperforming. This is the highest rate since at least 2015, according to Bank of America strategist Jared Woodard.
The Ideal Environment for Stockpickers
Woodard explains that recoveries historically provide the best opportunities for stockpickers, especially for highly cyclical small-cap companies that respond swiftly to changes in the economy. Unlike benchmarks, managers are better equipped to adapt dynamically and make informed choices in this favorable climate. Even with the recent rally, small-caps remain more affordable than their larger counterparts, widening the discount and allowing active managers to be more selective in terms of valuation.
Cyclical Sectors Taking the Lead
Over the past few months, cyclical sectors such as financials, energy, and industrials have been leading the small-cap market. Despite their strong performance, these sectors still offer significant discounts compared to their large-cap counterparts. At _, we have selected a few active funds that have more than 50% exposure to these sectors. Unsurprisingly, most of these funds are value-oriented but implement distinct strategies.
Introducing the Avantis U.S. Small Cap Value ETF
One standout fund is the Avantis U.S. Small Cap Value exchange-traded fund (ticker: AVUV). This fund offers a well-diversified portfolio with almost 600 holdings consisting of companies with low valuations and higher profitability ratios. It benefits from active management, providing the flexibility to make investment decisions based on price momentum, liquidity, and other important criteria. So far this year, the fund has achieved an impressive 30% return, surpassing many of its peers in the category.
The Avantis ETF: An Alternative Investment Option
The Avantis ETF, managed by Eduardo Repetto, a seasoned professional with 17 years of experience at Dimensional Fund Advisors, offers a unique investment approach. Known for its focus on factors like size, value, momentum, and profitability, the Avantis ETF stands out as an alternative to the $15 billion DFA US Small Cap Value fund (DFSVX). While the latter is only available to select advisors with access to Dimensional funds, the Avantis ETF provides a more tax-efficient solution and charges a lower fee of just 0.25%, compared to DFA’s 0.39%. Since its launch in 2019, the Avantis ETF has gained significant traction, amassing nearly $1 billion in assets.
Fidelity Small Cap Value Fund: A Concentrated Portfolio
The Fidelity Small Cap Value fund (FCPVX), boasting an impressive $3.5 billion in assets, follows a more concentrated investment strategy. With fewer than 100 holdings, the fund’s top 10 holdings make up nearly 20% of its portfolio, as reported by Morningstar. Notably, Signature Bank (SBNY) and Flagstar Bancorp (FBC) were among the fund’s top holdings as of January. The Fidelity Small Cap Value fund is recognized for its affordability among similar active mutual funds, with a competitive expense ratio of 0.96%. This year alone, the fund has delivered a remarkable return of 25%, surpassing the 19% gain of the index-tracking Vanguard Small-Cap Value ETF (VBR), which charges a significantly lower fee of 0.07%.
Undiscovered Managers Behavioral Value Fund: Capitalizing on Behavioral Biases
J.P. Morgan’s Undiscovered Managers Behavioral Value fund (UBVAX) takes an unconventional approach by leveraging behavioral biases in the market. The fund seeks out undervalued small-cap companies that exhibit substantial insider buying or stock repurchases, considering such actions as positive indicators of oversold stocks. With $7 billion in assets, the Undiscovered Managers Behavioral Value fund has an impressive 25% return this year, supported by a strong track record over the past decade.
Investors looking for potentially significant returns from small-cap stocks should consider these alternative investment options.