Smallcap stocks are trading at discounted prices. Here are three ways to cash in.

00:00 New Vanguard Fund Launches

00:35 Avantis U.S. Small Cap Value ETF AVUV

01:25 iShares Core S&P SmallCap ETF IJR

02:10 Schwab Fundamental U.S. Small Company ETF FNDA


Bryan Armour: “Magnificent Seven” stocks dominated the market in 2023, creating a rift between the valuations of large and smallcap stocks. Morningstar named it one of the top opportunities for equity investors in our 2024 Investment Outlook. ETFs in the smallvalue and smallblend categories currently have the most favorable valuations.

Still, our outlook for 2024 is rife with opportunities and risks. To combat uncertainty, diversified, lowcost smallcap ETFs offer the best chance at capitalizing on smallcap stocks’ cheap valuations. Here are three ETFs that can do just that.

The first ETF is Avantis U.S. Small Cap Value ETF, ticker AVUV. This ETF leans hard into the cheapest corner of the Morningstar Style Box. Selecting the cheapest and smallest companies comes with a high risk of value traps, meaning a company whose cheap valuation ends up being deserved due to its deteriorating business. Avantis sidesteps this risk by targeting profitable companies and by holding a diversified portfolio of about 750 stocks, so no one company can drag down performance.

The result is a higherquality smallvalue portfolio. The combination of cheap and profitable companies has been highly effective, with AVUV falling in the top 6th percentile of all smallvalue funds over the past three years. And AVUV only charges 25 basis points, a solid price for this actively managed ETF.

The second ETF is iShares Core S&P SmallCap ETF, ticker IJR. This ETF is for investors looking for broad smallcap exposure with less junk than the Russell 2000. S&P requires companies to be profitable before including them in their indexes—a distinction that becomes increasingly restrictive when applied to smaller companies.

The result is a portfolio of 600 companies for a low fee of 6 basis points. It stashes just 6% of assets in its top 10 holdings, ensuring that no one stock’s misfortune derails performance. So far it hasn’t: IJR has fallen in the top 13th percentile of smallblend funds over the past 10 years. This ETF would surely capture a bounceback for smallcap stocks.

The final ETF on my list is Schwab Fundamental U.S. Small Company ETF, ticker FNDA. This ETF tracks a Research Affiliates index that selects and weights holdings based on fundamental values. That means using sales, cash flows, and dividends to dictate portfolio weights instead of market cap. This approach tends to favor profitable firms, which again helps it avoid riskier bets in the smallcap market.

The resulting portfolio benefits from meanreversion without sacrificing diversification. The index’s disciplined approach and low fee help it carve out a solid edge against the Russell 2000. Performance reflects that advantage: FNDA’s returns fall in the top 14% of smallblend funds over the past 10 years. Its meanreverting style should work perfectly if small caps rally.

Catch up on more ETF news at Morningstar.com/etfs and follow me on X @MstarArmour.



What to watch from Morningstar.

Outlook for Vanguard in 2024    • Outlook for Vanguard in 2024  

Rivals Pursue Vanguard’s Unique ETF Strategy    • Rivals Pursue Vanguard’s Unique ETF S...  

Vanguard Makes Bigger Push Into Active Bond ETFs    • Vanguard Makes Bigger Push Into Activ...  

3 Great ETFs for 2024 and Beyond    • 3 Great ETFs for 2024 and Beyond  



Read what our team is writing.

Bryan Armour https://www.morningstar.com/people/br...



Follow us on social.

Facebook:   / morningstarinc  

Twitter:   / morningstarinc  

Instagram:   / morningstar.  .

LinkedIn:   / 5161