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Proprietary Data Insights Top Small Cap Blend Equity ETF Searches This Month
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A Solid ETF Strategy? Investing In Companies You’ve Never Heard Of |
In Monday’s Juice, we dug into how the big money — Fidelity and Wisdom Tree in particular — sees value in small cap stocks headed into 2024 and noted: Trackstar appears to at least partially confirm this sentiment. And not just among retail investors. If you take away leveraged equity ETFs (which advisors love to look at!), you’ll see that IWM is now the 4th most searched ETF among financial professionals. Of course, IWN tracks the Russell 2000 Index of small cap stocks. So, we got to thinking and decided to take a look at the top holdings of the iShares Russell 2000 Value ETF (IWN). Then, after seeing the list of stocks, we got to thinking even more, as smoke started pouring out of The Juice’s ears. What we found inside IWN reminded us of some of the oldest, most popular and possibly wisest investment advice. From the legendary former manager of the Fidelity Magellan Fund (FMAGX), 79-year old Peter Lynch. Here’s Lynch’s philosophy, best summarized in an old academic journal article on investing: The more familiar you are with a company, and the better you understand its business and competitive environment, the better your chances of finding a good “story” that will actually come true. For this reason, Lynch is a strong advocate of investing in companies with which one is familiar, or whose products or services are relatively easy to understand. Thus, Lynch says he would rather invest in “pantyhose rather than communications satellites,” and “motel chains rather than fiber optics.” If you’ve ever heard anyone say invest in what you know, the approach likely originated from Lynch. To illustrate his strategy, consider this from an April 2023 CNBC article: Lynch recounted how his daughter had bought an iPod for $250 at the time and how he recalled thinking Apple was making a high margin on it. Yet he didn’t buy the stock … Other than Apple, Lynch expressed regret for not buying into chip giant Nvidia, one of the biggest gainers in the semiconductor space in the past few years and a big enabler in artificial intelligence. “Nvidia has been a huge stock I wish I could pronounce it,” Lynch joked. You can still invest in Fidelity Magellan Mutual Fund, using the above-mentioned ticker, FMAGX. Here are its top ten holdings, alongside portfolio concentration:
All big, if not household names that comprise just over 35% of the 62 stock portfolio. FMAGX is actively managed and has returned an annual average of just under 15.4% since its 1963 inception. Over the last ten, five and one-year periods, it has returned roughly 10.8%, 10.2% and 12.7%, respectively. These figures are about inline with the S&P 500 by around a percentage point or two. When Lynch managed the fund between 1997 and 1990, it generated a 29.2% annualized return, routinely doubling the S&P 500. In 2021, Fidelity launched an ETF version of Magellan called the Fidelity Magellan ETF (FMAG). Swap Costco for Broadcom (AVGO) and you basically have the same top ten. FMAG is up approximately 22% over the last year, which beats the SPDR S&P 500 ETF’s (SPY) roughly 14% return and lags the Invesco QQQ ETF’s (QQQ) nearly 38% of upside. Which brings us to IWN and that small cap ETF’s top ten holdings:
Now if The Juice is nothing else — though we think we’re a lot more — we’re straight with you. So we have no shame in saying we haven’t heard of most of those companies. And, if most of you are being honest, you haven’t either! Does this rule out following Wall Street into small cap stocks in search of value and subsequent upside? Not necessarily. However, for some investors, this can kind of feel like poking in the dark. And we’re not fans of it. You might specialize in small caps or energy and industrial stocks as an individual investor. If that’s your thing, you’re likely an outlier. But, if you’re like the rest of us, you know the Peter Lynch stocks. You likely pass by them most days of the week. Not the same with those relatively obscure small caps. That said — playing the advocate for the devil — do you really know Costco just because you shop there? Or Apple because you have an iPhone? Sort of. You know one aspect of these consumer-facing stocks. But you might know zilch about their actual businesses. That said, if you want to actually dig into their businesses, you could probably make more sense of an Apple or Costco conference call, earnings report or SEC filing than you could the same from Chord Energy, “a company engaged in hydrocarbon exploration and hydraulic fracturing in the Williston Basin in North Dakota and Montana” or “Colorado’s first carbon neutral energy producer,” Civitas Resources. The Bottom Line: We spend probably way too much time thinking about this stuff. Ultimately, so you don’t have to. But it’s a valuable exercise. Lots of investors like to act as if. When they talk about rotating between sectors because they see value here or there. Many of them are — let’s face it — posers. Leave rotating in and out of sectors to these wannabes and the big money. Most of us will do just fine with a more straightforward, stay-the-course ETF approach that embraces something closer to the Peter Lynch philosophy on investing. |
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