Are small caps the place to be right now? They look like better value than the S&P 500 itself, which, in an environment that seems to vacillate wildly between soft-landing optimism and hard-landing, Fed-induced recession pessimism, is certainly worth taking a look at. That small cap opportunity may prompt investors to take a look at a duo of ETFs from American Century Investment’s brand Avantis Investors, the Avantis U.S Small Cap Equity ETF (AVSC ) and the Avantis U.S. Small Cap Value ETF (AVUV ).
What is driving small caps’ value moment relative to the big S&P 500? Based on trailing operating earnings, small caps are seeing at a 25% discount to large caps, one of the biggest discounts since the mid-1980s – they’re also trading at 16 times earnings on aggregate based on forecast earnings according to the Leuthold Group. Compare that to 19 times for large caps, for example, too.
Advisors themselves are already showing their hunger for small caps. On a year-to-date basis, meanwhile, small cap value as an equity factor was the second strongest based on returns, while small cap core and small cap growth rounded out the top five. Whether small caps are truly much cheaper, or U.S. large caps are very expensive, there’s a small cap opportunity to check out – and the Avantis duo can play a role.
AVUV has added a whopping $330 million in net inflows over the last month on top of $907 million across the last three months. The ETF has also seen a solid performance, returning 7.7% YTD and charging 25 basis points, according to VettaFi. AVSC meanwhile has added $11.2 million over one month and $56 million over three months, returning 8.4% YTD for a 25 basis point fee.
Both ETFs are priced above both their 200-Day and 50-Day Simple Moving Averages and are actively managed with a value-oriented view. AVSC looks to identify eligible securities with fundamental screens and look for book value, cash flow, and revenues as other notable factors, while AVUV looks to replicate the performance of an index with its active approach.
Small caps are subject to the same challenges of inflation and interest rates as large caps, but they still represent an intriguing option. With their maneuverability and value relative to large caps, they’re an area to watch for those wanting to play a small cap opportunity in both AVSC and AVUV, part of a broader Avantis equity suite that’s worth a look, too.
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