Small-cap stocks have been on a rollercoaster over the past few months. After outperforming the S&P 500 index in recent months, the Russell 2000 fell sharply lower over the past two weeks, and you can probably guess why. The small-cap index is heavily weighted toward the financial sector, which isn’t a good place after the recent spate of regional bank runs.
But, of course, sharp sell-offs often yield great investment opportunities. That’s because investors often sell indiscriminately during a crisis, leaving some high-quality companies trading at unnecessarily low valuations – for instance, well-capitalized regional banks.
In this article, we’ll explore how active ETFs can help investors capitalize on the small-cap sell-off and two newly launched funds to consider for your portfolio.
See our Active ETFs Channel to learn more about this investment vehicle and its suitability for your portfolio.
Capitalize With Active ETFs
Passive ETFs provide broad, diversified exposure to a market, but they’re not always helpful for capitalizing on a crisis. While the Russell 2000 could recover from an unnecessarily steep drop, discerning asset managers can usually spot better values. For example, some small-cap financial institutions have seen their valuations drop despite their limited exposure.
In addition, active ETF managers can cut financial exposure and focus on other oversold small-cap stocks. For instance, they may focus on energy companies or other sectors. And they may use fundamental criteria to weight a portfolio rather than market capitalization, helping better manage risk and concentrate on specific promising opportunities.
Two New ETFs to Consider
J.P. Morgan recently launched a new active non-transparent ETF in the space. The JPMorgan Active Small Cap Value ETF (JPSV) employs a bottom-up approach to invest in small-cap stocks with attractive fundamentals. In particular, the managers seek out companies with niche leadership, less cyclicality, and strong management teams.
The fund’s top (proxy) holdings include:
- Selective Insurance Group Inc. (SIGI) – 2.24%
- Patterson Cos. Inc. (PDCO) – 1.55%
- Comfort Systems USA Inc. (FIX) – 1.48%
However, the fund’s somewhat steep 0.74% expense ratio could deter cost-conscious investors.
Another relatively new option for investors is the actively managed EA Bridgeway Omni Small-Cap Value ETF (BSVO). Using a statistical, evidence-based approach, the fund managers invest in a broad and diverse group of securities using a market cap weighted approach. And with a modest 0.47% expense ratio, it’s also about half of J.P. Morgan’s fund’s expense.
The most significant holdings include:
- PBF Energy (PBF) – 1.17%
- Permian Resources Corp. (PR) – 0.97%
- M/I Homes Inc. (MHO) – 0.76%
Alternatives to Consider
| Name | Ticker | Expense | AUM | YTD +/- |
| Schwab Fundamental US Small Company ETF | FNDA | 0.25% | 5.9 billion | +0.81% |
| Avantis US Small Cap Value ETF | AVUV | 0.25% | $5.2 billion | -3.50% |
| Dimensional US Small Cap ETF | DFAS | 0.26% | $5.0 billion | -0.02% |
| Aventis International Small Cap Value ETF | AVDV | 0.36% | $2.6 billion | 1.70% |
| WisdomTree Emerging Markets Small Cap Dividend ETF | DGS | 0.58% | $2.6 billion | 1.36% |
The Bottom Line
The failure of SVB and other regional banks has put pressure on small-cap stocks, but indiscriminate selling could yield attractive opportunities. Investors who don’t want to conduct their own fundamental analysis may want to consider active ETFs to capitalize on the indiscriminate selling by finding opportunities in the banking sector and beyond.
Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.
