Today’s episode - “small-cap” stocks

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Good Morning! ✋ 

Market winds are shifting, and small-cap stocks are catching the breeze. With the Federal Reserve potentially poised to lower interest rates, these agile companies are primed for a growth spurt. But with opportunity comes choice - and that's where we come in.

In this issue, we're diving into the dynamic world of small-cap ETFs. From value-focused funds to cutting-edge healthcare plays and even a glimpse into India's booming market, we've curated a list of the top contenders to help you navigate this exciting investment landscape.

Whether you're a seasoned investor or just starting out, join us as we explore the potential of small-cap ETFs and uncover the hidden gems that could supercharge your portfolio.

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Investors anticipate the Federal Reserve might cut interest rates in its upcoming September meeting. This potential rate cut has triggered a significant boost in small-cap stocks, evident from the Russell 2000 index's impressive 10% rise. Small-cap companies, which often rely on borrowing to fuel their growth, stand to benefit substantially from lower interest rates, as cheaper borrowing costs could accelerate their expansion.

Here's a look at some of the best small-cap ETFs to consider, especially with the market showing some pullbacks that could present investment opportunities. I lean towards investing in ETFs rather than individual stocks in this sector. ETFs offer a diversified approach, mitigating the risks of investing in smaller, often newer companies.

1. Avanti US Small Cap Value Fund (AVUV)

Overview: The Avanti US Small Cap Value Fund (AVUV) is an actively managed ETF with a relatively low expense ratio of 0.25%. This fund targets value companies—those trading at lower prices relative to their fundamental value metrics and demonstrating high profitability.

Key Features:

• Focus: Value companies in financial services, industrials, and consumer cyclical sectors.

• Exclusions: Avoids real estate and utilities sectors.

• Performance: Outperforms the S&P 500 in all three timeframes: trailing 12 months, 3-year CAGR (over 10%), and 5-year CAGR (over 15%).

• Assets: Over $12 billion.

Why It’s Notable: The fund's strategy of focusing on undervalued companies with solid financials has paid off, making it a strong candidate for growth, particularly if interest rates are reduced.

2. TEMA GLP-1 Obesity and Cardiometabolic ETF (HRTS)

Overview: The TEMA GLP-1 Obesity and Cardiometabolic ETF (HRTS) is a newer fund with a focus on small-cap companies involved in obesity treatment and cardiometabolic health. While it includes major players like Eli Lilly and Novo Nordisk, it also features promising small-cap companies such as Muriel Biopharma.

Key Features:

• Focus: Companies combating obesity and cardiometabolic disorders.

• Performance: Up 13% YTD and 29% since inception.

• Expense Ratio: 0.75%.

• Analyst Rating: Strong buy with a 46% upside over the next 12 months.

Why It’s Notable: With obesity affecting a significant portion of the U.S. population and treatment rates still low, this sector presents a massive growth opportunity. The ETF’s focus on innovative treatments in a high-growth area could lead to substantial gains.

3. Invesco S&P SmallCap 600 Revenue ETF (RWJ)

Overview: The Invesco S&P SmallCap 600 Revenue ETF (RWJ) tracks the top 600 small-cap companies weighted by their revenue, with a cap of 5% per company.

Key Features:

• Focus: Revenue-weighted exposure to small-cap companies.

• Sector Allocation: Emphasizes consumer cyclical, industrials, and technology.

• Performance: Comparable to the S&P 500 over 12 months, 3 years, and 5 years, but with a 5-year CAGR of 16.6%, outperforming the S&P 500 by over 1500 basis points.

• Dividend Yield: 1.28%.

Why It’s Notable: Its revenue-weighted approach can lead to different sector exposures and performance compared to other small-cap ETFs. This strategy has proven effective, especially in the context of a favorable economic environment for small-cap stocks.

4. Vanguard Small Cap Growth Index ETF (VBK)

Overview: The Vanguard Small Cap Growth Index ETF (VBK) targets companies with high growth potential based on various financial metrics.

Key Features:

• Focus: Small-cap growth companies.

• Top Sectors: Technology, industrials, and healthcare.

• Expense Ratio: Very low at 0.07%.

• Performance: Slightly lower than RWJ but remains popular with over $17 billion in assets.

Why It’s Notable: Its low expense ratio and focus on high-growth sectors make it a solid choice for investors looking for growth potential in small-cap stocks.

5. iShares MSCI India Small Cap ETF (SMIN)

Overview: The iShares MSCI India Small Cap ETF (SMIN) provides exposure to India's rapidly growing economy through small-cap companies.

Key Features:

• Focus: Small-cap companies in India.

• Top Sectors: Predominantly industrials.

• Performance: Leading the group with over 37% in the trailing 12 months and strong 3-year (14%) and 5-year (19%) performance.

• Expense Ratio: 0.79%.

Why It’s Notable: India's economic growth and expanding manufacturing sector present significant investment opportunities. Despite its higher expense ratio, the ETF offers strong potential for future gains.

6. First Trust RBA American Industrial Renaissance Fund (AIRR)

Overview: The First Trust RBA American Industrial Renaissance Fund (AIRR) focuses on U.S. companies benefiting from reshoring manufacturing.

Key Features:

• Focus: Industrial sector, with a concentration in 45 holdings.

• Performance: Up over 25% in the trailing 12 months and strong 3-year (over 19%) and 5-year (over 19%) performance.

• Performance Comparison: Outperformed the S&P 500 significantly with a five-year return of over $26,000 from a $10,000 investment.

Why It’s Notable: The fund’s focus on industrials and reshoring aligns with current economic trends, making it an intriguing option for investors interested in domestic manufacturing growth.

That’s it for this episode!

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Cheers to wealth, wisdom, and a dash of madness!

The Investing Wise Academy Team

Disclaimer: This newsletter is for informational purposes only and should not be considered financial advice. Please consult with a financial advisor before making any investment decisions.