The Best Small Cap ETF No One Talks About

Normally, we aren’t fans of small or mid-cap ETFs. 

These ETFs unnecessarily cut out stocks that grow too big for the index, leaving you with the worst relative performers.

But our TrackStar data highlighted an unusual ETF that financial pros kept under the radar.

It’s a small-cap ETF we’d never heard of. Yet, its 3-year total return clocked in at a whopping 50.3% compared to the Russell 2000’s -2.4%

So, what is the name of this magical wonder?

Key Facts About Avantis U.S. Small Cap Value ETF (AVUV)

• Net assets: $8.9 billion
• 12-month trailing yield: 1.7%
• Inception: Sept. 24, 2019
• Expense ratio: 0.25%
• Number of holdings: 1,000

The surprising performance of this relatively new ETF caught our attention. But when we saw it had a diverse 1,000 stock holding, we figured there was probably an edge here.

The AVUV ETF invests in U.S. small-cap companies trading at low valuations with higher profitability. Although it’s a market-cap-weighted index, no company accounts for more than 1.06% of the total portfolio.

Source: Avantis

What’s fascinating is that the AVUV ETF strays markedly from the benchmark Russell 2000 Value Index as shown below.

Source: Avantis

Why is that? 

Because AVUV takes an active management approach instead of a passive one.

This is rather surprising, given the expense ratio is only 0.25%. However, it explains the difference between the ETF and its benchmark.

Performance

Equally as important, the active management approach has allowed AVUV to deliver returns far above the passive index.

You can see below how the benchmark’s 3-year average performance is less than half that of AVUV.

Source: Avantis

Competition

Given the stunning performance, we wanted to compare the results to other small-cap ETFs to see how far above the rest it landed.

• iShares Russell 2000 ETF (IWM): A passive ETF that follows the Russell 2000 index as closely as possible.
• iShares Core S&P Small-Cap ETF (IJR): Similar to the IWM, the IJR tracks the S&P 600 small cap index. However, this fund focuses on keep expenses as low as possible.
• Pacer US Small Cap Cash Cows 100 ETF (CALF): The Pacer small cap cash cow fund focuses on small caps that produce high free-cash-flow yields (the cash generated after taxes and CAPEX but before dividends).
• Schwab Fundamental U.S. Small Company Index ETF (FNDA): FNDA is similar to the IWM, but tracks the Russell RAFI US Small company index, which uses a fundamentally weighted approach instead of a market-cap weighted approach like the Russell 2000.

Clearly, a passive, market-cap-weighted approach underperforms other strategies.

The ETFs that focus on fundamentals in some way see much higher returns.

Our Opinion 9/10 

While we typically wouldn’t recommend an actively managed fund, the low expense ratio and fantastic returns make the AVUV ETF quite compelling.

At minimum, if you’re looking to invest in a small-cap index, our data suggests you select one that focuses on fundamentals rather than market-cap.