Small-Cap Investor Secret Revealed: How Active Value Investing Crushes Passive in 2021

Explore the Avantis US Small Cap Value ETF’s Winning Strategy and Outperformance!

New York, NY – Investors navigating the small-cap market have faced challenges since 2021, with many stocks still trading below their previous highs. This trend has led to a surge in large-cap investments, overshadowing passive investment strategies in the small-cap sector. However, active value investing in small-cap stocks has shown a different story, with notable success from funds like the Avantis US Small Cap Value ETF.

Unlike passive index-tracking funds, the Avantis US Small Cap Value ETF employs a rule-based strategy that combines the benefits of indexing with active decision-making. By analyzing market prices and company financials, the fund aims to identify securities that offer the highest return potential based on factors such as low valuations and high profitability ratios.

A key aspect of the fund’s strategy is its emphasis on high profitability ratios, which helps filter out “zombie companies” burdened with debt and low margins. This focus on sustainable profitability proves crucial, especially in a potentially rising interest rate environment where the survival of companies with weak financials could be questioned.

The Avantis US Small Cap Value ETF boasts a diverse portfolio with 761 holdings, ensuring no single position dominates the fund’s allocation. This diversity spans across various sectors, with companies like Abercrombie & Fitch Co., KB Home, and SM Energy representing different industries within the small-cap market.

In terms of sector breakdown, the fund deviates from the typical large-cap portfolios by allocating significantly to Financials, Consumer Discretionary, and Industrials. Its minimal exposure to the Tech sector, at just 5% of the overall fund, caters to investors seeking alternatives to the currently overvalued and crowded Tech industry.

Comparing the Avantis US Small Cap Value ETF to passive counterparts like the iShares Russell 2000 Value ETF reveals the advantage of active management in the current market cycle. The fund’s outperformance can be attributed to its focus on identifying stocks with greater potential returns based on profitability and valuation metrics, coupled with a broad sector distribution strategy.

While the fund’s active management has proven successful thus far, investors should be aware of the inherent risks associated with small-cap value stocks. These companies tend to be more volatile and susceptible to market fluctuations compared to their larger counterparts. Additionally, the value investing style may lag behind growth stocks during periods of market favoritism towards growth-oriented investments.

Overall, the Avantis US Small Cap Value ETF presents a compelling option for investors looking to tap into the potential of the small-cap value segment. Despite the inherent risks, the fund’s solid performance and diverse sector exposure paint a promising picture for its future growth trajectory in the evolving market landscape.