Wall Street is concerned about the latest Consumer Price data released on July 13, which saw inflation increase by 9.1% year-over-year. Numbers suggested “the increase was broad-based, with the indexes for gasoline, shelter and food being the largest contributors.”
Readers may remember that May’s reading of 8.6% was the largest increase in more than four decades. Now, most analysts concur the Federal Reserve will continue its aggressive rate hikes the rest of the year.
Meanwhile, investors are gearing up for new upcoming earnings. Despite the sell-off, earnings expectations on Wall Street have remained resilient across the board.
For instance, both the Russell 2000 Index and S&P 600 Small Cap plummeted around 25% since January. By comparison, the S&P 500 Index and the Dow Jones Industrial Average have dropped 22% and 16%, respectively.
Portfolio manager at Royce Investment Partners Chuck Royce and Co-CIO Francis Gannon see long-term value in small-cap stocks, saying:
“Small caps have averaged a 3% premium to large-caps over the past 20 years. At the end of June, however, small-caps were at a 20% discount, at their lowest relative valuation versus large-caps in more than 20 years.”
We also remain confident of the performance of small caps in the months ahead. Given their risk/reward profiles, most small caps underperform the broader market during declines. But when the tide turns positive, they tend to lead on the upside.
One of the best ways to take advantage of such growth would be to buy the dips of an exchange-traded fund (ETF) that offers broad exposure to small-cap stocks. Therefore, today’s article introduces two such funds. However, we should note that many small-cap ETFs include several mid-cap names as well.
1. Avantis U.S. Small Cap Value ETF
Current Price: $67.99
52-Week Range: $66.41 – $84.59
Dividend Yield: 1.91%
Expense Ratio: 0.25% per year
The Avantis® U.S. Small Cap Value ETF (NYSE:AVUV) is an actively managed fund that invests in U.S. small caps trading at low valuations and with relatively high profitability ratios. The fund was first listed in September 2019.
AVUV, which follows the Russell 2000 Value Index, currently has 652 stocks. Financials have the largest slice with 30%. Next come industrials (16%), energy (15%), consumer discretionary (15%) and materials (7%).
The largest 10 holdings account for roughly 7.5% of $3.14 billion in net assets. Murphy USA (NYSE:MUSA), which operates gas stores; intermodal container leasing group Triton International (NYSE:TRTN); poultry producer and processor Sanderson Farms (NASDAQ:SAFM); logistics company Ryder System (NYSE:R); and building solutions provider Louisiana-Pacific (NYSE:LPX) are among the leading names on the roster.
AVUV saw an all-time high in November 2021. But the ETF is down more than 15% so far this year and hit a 52-week low on July 6. We like the diversity of the fund and believe long-term investors can find value at the current levels.
2. Pacer U.S. Small Cap Cash Cows 100 ETF
Current Price: $33.99
52-Week Range: $32.88 – $47.33
Dividend Yield: 3.30%
Expense Ratio: 0.59% per year
Wall Street loves companies with stable and large cash flows. Analysts concur that when rates rise and growth slows down, cash flow becomes even more valuable. Understandably, companies with large free cash flows can…
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