Forget the Russell 2000. This Small-Cap ETF May Be the Smarter Buy
Forget the Russell 2000. This Small-Cap ETF May Be the Smarter Buy.
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AVUV's active value tilt has nearly doubled IWM's 5-year annualized return, posting 14% versus 8% while trading at a cheaper P/E of 12x.
IWM tracks all ~2,000 Russell 2000 companies regardless of profitability, forcing investors to hold weaker businesses vulnerable to rising borrowing costs.
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Small-Cap stocks have been some of the market's strongest recent performers, with year-to-date returns for the Russell 2000 Index up approximately 20%. However, investors looking to capitalize on the continued strength in small caps may want to look beyond just simply owning the benchmark index.
The Avantis U.S. Small Cap Value ETF (AVUV) offers a more selective alternative, targeting small-cap companies with attractive valuations and strong profitability characteristics.
While AVUV carries a higher expense ratio than traditional Russell 2000 ETFs, the fund's focus on quality businesses makes it a smarter way to gain small-cap exposure over the long term.
The Russell 2000 is one of the most widely followed benchmarks for U.S. small-cap stocks, offering broad exposure to roughly 2,000 companies. However, that diversification also means that investors gain exposure to companies regardless of their profitability, financial strength, or valuation. Simply put, if it is in the index, then you own it.
This can be particularly worrisome in the small-cap space, where many companies are unprofitable or carry weaker balance sheets than their larger counterparts. These businesses can be more vulnerable to higher borrowing costs and potential economic slowdowns, resulting in an increase in risk that investors must consider.
Rather than simply owning the index, investors may benefit from a more selective strategy that emphasizes companies with stronger underlying fundamentals.
This is where the Avantis U.S. Small Cap Value ETF (AVUV) comes into play. Unlike ETFs that passively track the Russell 2000, AVUV is an actively managed fund, providing its portfolio managers greater flexibility in deciding which small-cap stocks to own.
As such, the fund generally targets companies trading at lower valuation multiples while also emphasizing higher profitability characteristics.
This approach allows AVUV to be more selective than traditional small-cap index funds, potentially avoiding some of the weaker companies that appear in the broader Russell 2000.
Rather than owning a stock simply because it qualifies for inclusion in the index, AVUV seeks to tilt its portfolio toward small-cap companies with characteristics that can support longer-term returns.
The benefits of AVUV's active approach become clearer when compared with the broader small-cap market. For comparison purposes, the iShares Russell 2000 ETF (IWM), which tracks the Russell 2000 Index, serves as an investable proxy for the benchmark.
Year-to-date, AVUV has returned 24.50%, compared to 20.58% for IWM. Three- and five-year performance has also been stronger for AVUV, with annualized returns of 18.25% and 14.00%, respectively.
Additionally, AVUV also trades at a lower P/E and P/B ratios of 12.23x and 1.41x, demonstrating the funds value strategy.
While investors pay slightly more for AVUV's active management, with an expense ratio of 0.25%, its stronger historical performance and quality tilt more than justify the slight additional cost.
