ETF Battles: IWC vs. FDM vs. AVSC - Triple Header Micro Cap Skirmish!

History shows that small cap stocks tend to outperform large caps over the long run.

But what about micro cap stocks?

These are the tiniest of publicly traded companies, typically with a market size of less than 500 million.

Well, on today's episode of ETF Battles, we're going to examine an audience requested triple header between micro cap/s small cap ETFs from Black Rockck Invesco and First Trust.

Who wins the battle?

Find out right after this.

This is ETF Battles and I'm Ronda Ley.

It's so great to see you again.

This is the place where we congregate to analyze and judge ETFs versus each other.

If it's your first time watching, welcome aboard and be sure to hit that subscribe button to join our community.

Hit me up in the comment section below if there's an ETF battle that you'd like to see.

Send me your exact ETF tickers.

Or you can also hit us up on my X feed at ETF guide.

Be sure to check out our season 6 ETF battles playlist to make sure that the requested matchup that you're making has not already been done.

Also, be sure to check out the video description section below.

I've got links to our program sponsor direction.

Uh besides leverage and inverse choices on broad market indexes, there's lots of choices for ETFs linked to industry sectors along with MAG 7 and single stocks like Nvidia, Palunteer, Tesla, and many others.

So be sure to visit direction.com.

So today's triple header was requested by a longtime viewer named Keith and he's got the username ke.

And this time it's between micro caps, small cap ETFs.

It's a skirmish between Black Rockck First Trust and Advantis.

Thank you so much, Keith, for your excellent battle suggestion.

I'm really looking forward to this one.

So, which of these ETFs is the best choice for small cap/micro cap investors?

Well, judging today's triple header is a duo extraordinaire.

We've got Shaina Sisle with Bambrian Capital Management and Mike Akens with ETF Action joining us.

Guys and ladies, great to see both of you again.

Welcome back. >> Thank you for having me back and apologies if you can hear my dog barking. >> Everybody loves dogs.

Great to be here, Ron. >> We're glad to have both of you with us.

And we're going to blaze through our four battle categories one at a time and give you an opportunity to weigh in.

Uh for the mystery category, that's where you, our judges, can pick any single factor that you feel is crucial to today's contest.

Our judges can also nominate wildcard ETFs if they feel there's better choices elsewhere, or they can opt for split decisions.

I've got the scorekeeping chores.

At the end of the program, we will declare an overall winner.

Also, none of the the battle outcomes are never are ever predetermined or known in advance by myself or our judges.

The first category is cost.

Let's kick things off with Shaina.

Please get us started. >> All right.

So, this is a pretty cut and dry uh winner.

Uh the Avantis uh small cap fund has the lowest expense ratio at 25 basis points.

Uh it has the lowest spread for trading at 13 cents.

Um it also is sizable assets at uh about$ 1.4 billion dollars.

And for those reasons, this is a pretty easy answer.

Uh it is 100% the this fund.

The other two funds are the same expense ratio uh but they have much smaller asset bases and the liquidity trading is a little bit more difficult. >> That's a strong start.

Thank you Shaina.

Mike, you're up next.

How do you see it in terms of cost? >> Yeah, I mean I got not much to add there.

Advantis is, you know, more than half the 50% cheaper and it trades tighter.

So, it's pretty much a hands down winner in terms of on that.

I would add that if you're really looking for pure beta play to that small cap space and we can talk about micro cap and small cap as we go along, but there's sure products out there like IWM or something that trade with basically no spreads um that might be better for tactical players, but in this battlec is the clear winner. >> That takes us next to exposure strategy and Mike, you're still up.

So break it down for us.

How do these three ETFs compare?

So, I mean, they all are going to have a small cap bent.

Um, some more small cap kind of enter that that micro cap.

Whether they're traditionally truly market cap or not is up for debate.

Um, where I don't really want to focus on that though.

Um, what I do want to focus on is when thinking about exposure for small cap or micro cap, you know, there's kind of this index idea, just own the market like we do with the S&P 500 or the Russell 1000, or are you going to screen away certain things?

Um and in my mind there's one product that jumps out ahead of the the others in this idea and that is the first trust Dow Jones select micro cap in that it has a number of quality screens that it does on this space of the market and as a result if you look through to the underlying of the portfolio much smaller number of holdings but really what I look at is over the last 12 months are these companies making money and when you look at FDM 81% of the portfolio IO um companies inside the portfolio have positive net income over the past um 12 months whereas if you look at something like IWC 46% so over 50% of the companies in that um portfolio lost money last year um so there's clearly you know you're buying speculative it may jump in a market that's really beta driven you might get more opportunity at IWC but you are buying a lot of companies that are not going to be here in a few years um and that's just a simple result of passive investing on that large of a universe of small micro cap names.

AVSC is pretty good.

It's at 73%.

So, and it's got an interesting overlay.

It owns a lot more securities than I FDM does, but I think just purely in this space, and I'll get a little bit more into it in mystery as I go along, but I like the screening methodology of FDM in this particular area. um just from a standpoint of owning a little bit more quality names within the small micro cap space. >> Great points.

Thank you, Mike.

Shaina, you're up next.

How do you see it in terms of exposure strategy? >> So, I want to get on my high horse, which is something I tend to like to do on this show.

Uh but none of these are micro cap uh funds.

I I want to start there.

Um I actually dug into this because I used to cover small caps when I worked at Fidelity SAI.

Then when I worked at Aerial, we had a true micro cap fund in the Aerial Discovery Fund.

Um, and micro cap is inherently difficult to trade.

Um, it actually has very limited liquidity and all of these funds use liquidity stream uh screens.

But on top of that, if you look at the bottom 20% of Del of all US market cap stocks, right?

Um, and FDM says that that they look to invest in the bottom 20% of uh stocks that trade on the NYSE or the NASDAQ.

If you just look at that, the market cap of those names um whether they trade on an index or not, uh, is between 30 million and 300 million, right?

So, they don't actually trade on exchanges.

They're penny stocks for all intents and purposes.

Um and so micro caps inherently have attributes to them that make them uh unusual um and a very good diversifier.

They're almost like the only way you can get kind of venture capital/private equity exposure in public markets because they do trade in that sense.

Uh so these are all small cap funds.

And with that in mind, um I agree with Mike in that the FDM, the first trust product, seems to have the clearest screens and also um generally speaking has an average market cap of the securities under uh in the portfolio that I can get behind as being like the smallest of the small cap at 1 billion, right? um uh IWC it's uh average market cap is 750 million but there's not a big jump between 750 and 1 billion and the jump is really a quality and a liquidity differential uh and when you're going to be more concentrated in the space you got to have liquidity as a key screen so for me I agree with Mike the standout for me is FDM um I do think it has a better methodology but let's not pretend it's active because it's not it's just a better passive uh and uh the way they're going about and approaching the space.

So um it's FDM for me with a caveat that none of these are micro cap funds. >> That takes us next to performance and Sheena, you're still up.

How do these funds compare in terms of their historical uh performance? >> Starting by saying the Avantis fund doesn't have the longest track record in the world.

It was launched in 2022.

Uh while the other two have very long track records, they have 20 years of history here. um uh when I look at the performance the the standout for consistency now it doesn't outperform over all periods as we stand today however the consistency and the ability to outperform on the longer full market cycle trends it is FDM and again I think it comes down to some of the things we talked about when you're talking about ETFs and specifically in this space you have to worry about liquidity and liquidity in a small cap space.

If you're looking um to make sure that there's enough liquidity, you're going to kind of lean towards quality and that's going to give you better returns in a space where there's a lot of junk.

Um and and and so for me, it's FDM.

It outperforms over the year to date, the one-year, the three-year, and for the 5-year where IWC also has a 5-year number, it outperforms overall periods. >> Perfect.

Thank you, Shaya.

And for liquidity, what are you referring to? just familiarize some of our audience members that that might not be so familiar with liquidity.

Both of you have hit on that a couple of times, but just mention what liquidity is, Shaina. >> So, liquidity is how easy it is to trade the stock.

So, I believe, and Mike can correct me if I'm wrong here, the SEC has an actual like liquidity um requirement for these daily liquid publicly traded products, whether it be a mutual fund or an ETF.

You need to be able to liquidate the entire portfolio in a certain amount of time and a certain percentage of the portfolio has to be able to be liquidated in a day.

And so that means that how easy is it to trade out of these stocks?

How active is the market maker in the space?

Because true micro caps have almost no liquidity because there's no market being made.

There's not a lot of bid ask spread.

Um and so liquidity is referring to how easily could you liquidate the entire portfolio if you needed to.

And the SEC requires that publicly traded daily liquid instruments like ETFs and mutual funds maintain a certain percentage of their portfolio be liquid in uh one trading day and then the rest has to be within buckets, but it is limited and so that's what we're referring to. >> Got it.

Thank you for those added details.

Mike, you're up next.

How do you see it in terms of performance? >> Well, first on the liquidity front, uh Shane, I got it absolutely right. um that's is a valuation metric regarded with registered investment companies require that you liquidate your certain part of your portfolio.

You could have a subset that's not there, but by by and large 70 plus% of your portfolio has to be able to get out in a set number of days.

Um and that to that end means that ETFs are not right.

Even though ETFs the name of my company, it's all I've done for 20 years.

ETFs are not right for every investment place.

Um, which is why I think Shannon does a great job talking about these being small cap vehicles and not micro cap vehicles.

Uh, that being said, FDM is the clear winner.

Um, not only in historical performance, I think if you're looking for alpha opportunity in this space, I think FDM um, has the best opportunity to present that.

Um, but I would note that if you're thinking about it from a perspective of core versus satellite, um, I would put IDM more of an alpha generator.

If you're looking for less tracking error, FDM is going to introduce some serious tracking error to something like IWM, the Russell 2000.

Um whereas ABSC is going to have much less tracking error with still that opportunity to provide better riskadjusted returns.

So you always have to think about it in context of how am I holding this and how does it fit into your overall book.

But in this battle and terms of the way we're judging here, um historical perform performance is clear. uh FDM has crushed the others as well as I think on a long-term um basis.

I think it's got a chance to continue to do that though it will come in lumps.

So your tracking error can be significant to your broad-based benchmark when you start getting to such a small subset of a high active share relative to a broad benchmarks.

But FDM is my winner and um yeah, we'll just leave it at that.

That takes us next to the mystery batter category where our judges could give us that certain factor or multiple factors that they feel are crucial to today's contest.

So Mike, what is your mystery batter category and which of these ETFs wins it? >> We're going to go back in time a little bit here to to go into my mystery batter, but we're talking about the small cap space or micro cap, but really we're talking about small cap investing, especially through that of an ETF.

Um, historically when you think about ETFs, it's about allocation tools. about gaining access to a market.

Historically, small cap has provided outperformance over full market cycles because you're taking more risk, right?

Um, but there's been a big dynamic shift over the last 30 to 40 years.

Um, in the idea that small caps used to pick up a whole lot of new IPOs.

You know, we used to get four 500 IPOs a year before 2000.

And those IPOs would come to market, they'd come in as small companies.

They'd enter the small cap indexes.

They'd slowly grow.

You'd get that price appreciation. and you'd repeat and you rinse and you'd get that uh resetting of the small cap um opportunity set and you're taking more risk getting more return since the tech bubble and then again in the financial crisis there's been regulation changes there's been a dynamic shift um in terms of how soon mar these companies come to market how easy it has come to market and we've seen a plummeting in new IPOs year-over-year you know um where we used to have 400 plus prior to 2000 now you're seeing less than 200 in some case some years less than 100.

And another big dynamic is that is that we've had this big boom in kind of private equity funding which has led to this issuance of what we call unicorns.

There's companies that are coming to market now, the big IPOs are skipping right past small cap and in most case right past midcap and going right into large cap indexes and you're missing that whole opportunity set.

So, all that kind of sets me up to to encourage your audience to think about small cap a little bit different than it used to be.

Um, now if you're going to outperform, I still believe in small cap.

I actually think that adding that risk and will get you longer ter outperformance over time.

It's just a math game.

You're going to get a little higher beta, a little higher return.

But I think you got to strategically think about doing it where you're either applying a really good screen set or actively managing in the space because it's not just a hey I'm going to pick up these IPOs and outperform and get that growth.

You're you really need to find hey this is a company like in the industrial sector or in the material sector.

It's always going to be a small cap.

They're they have a limited marketplace and sometimes they're going to be overvalued and other times undervalued.

I want somebody picking that subset of the market and either doing a really good screening job or um you know actively managing it.

So I would encourage folks in this space to look at some of the traditional big shop active managers that are known for their small cap investing.

I won't go you know the T-Rocks the capital groups um that can actually do a bottomup fundamental analysis.

I think in this area of the market that can add value and it's worth paying 20 30 extra basis points to get that opportunity set because that dynamic has just fundamentally changed and I don't see it reversing anytime in the future.

Hopefully not before I retire because that it just doesn't look like it's the case.

So that's my mystery category.

I don't have a winner for these three ETFs, but I think it really sets up a way to think about that small cap investing has dynamically just changed. has fundamentally changed over the last 20 to 30 years and that has to be in the thought process of investing in this space. >> Great observations, Mike.

All of those gains that uh or potential gains that small cap investors used to be able to capture are now being recaptured by insiders and venture capitalists.

They're the ones enjoying that that ride.

So, um thank you for those observations.

Very keen um and timely.

Shaina, you're up next.

Uh what is your mystery bat category and which of these ETFs wins it? >> So Ron, I am going to do exactly what Mike did, which is get into exactly some of the dynamics.

He um presented information a little differently than I'm going to, but we're both making virtually an identical point.

So everything Mike said is true.

The one thing I would add is that it's not only that IPOs aren't happening or that they're happening when a company is far more uh developed um but also the number of publicly traded stocks has been decreasing significantly over the last 20 years.

And it's usually the ones at the bottom that are being acquired and taken out or being um taken private uh because they're under some sort of stress or in a special situations and that's the right way to fix whatever problems are with that company.

So everything Mike said aligns with what I am going to say too. micro caps to me.

Um, and again, I had the great fortune of working at Aerial Investments when they had the Aerial Discovery Fund, which was run by a gentleman named David Malay.

And David was uh a micro cap expert.

And that fund invested truly in micro cap stocks.

But because it did, it never performed at all in correlation with equities because liquidity and all kinds of things that impact how micro cap funds or stocks trade. today.

If you want that kind of exposure, you got to go to the private markets.

Exactly the point Mike was saying.

If you want to get all the attributes that small and micro cap stocks used to provide, you you get it in the private markets.

That's where those attributes now reside.

So, these products have inherent headwinds to them that are structural. you know, there's a lot of debate on why small caps have underperformed and Mike did an amazing job breaking it down uh completely.

And so for me, you know, exactly what Mike said, if you're going to do small cap, the one thing that has been persistent in small cap is that active management adds alpha.

And that has historically been true because small caps are rising stars and falling uh falling knives.

And you want to avoid the falling knives.

And if you uh tend to uh invest just in an index, there's a lot more falling knives in the index than rising stars.

That's always been the case.

So active management has always been better.

That's also why if you look at the two major small cap indices, the S&P 600 and the Russell 2000, because the S&P 600 has a smaller number of names and has a quality screen, it always persistent outperforms the Russell 2000.

Always.

There's not very few if almost no periods of which that is not the case.

Speaking to that quality bias of active uh management that occurs when you are selecting with a quality bias.

So in this space you want an actively traded small cap fund or micro cap fund.

And if you look at historically when we always say you know only 70 only 70% of fund active managers don't outperform their benchmark in large cap.

It's not true in small cap. that's different in small cap.

And so you want an active manager.

If you look at how small caps have done in this period where small caps have had this structural headwind, active has substantially outperformed passive.

All three of these funds are passive and so I wouldn't touch any of them.

And so I have no winner.

And I'm uh kind of um building off what Mike talked about in terms of like the problem that's structural in this space and why if you want to get the attributes you used to get in small caps, you really got to look at private markets to do it. >> All right, so now we've moved to the part of the program where our judges can give us their overall battle winner.

And will we get any wild cards?

This is our judges final chance to give us any wild cards that they may have hiding up their sleeves.

I don't know if we're going to get that.

Shaina though, it's your final chance to weigh in which of these ETFs wins the battle. >> So, for me, uh really none of them.

And I don't really have a wild card either.

Um because when I was thinking about, okay, what would I throw out there as a wild card?

Most of the um private uh most of the publicly traded ETFs that claim to be in private markets aren't really in private markets.

And so, they tend to be more midcapy.

So you got like crane shares just launched by o uh b u y o like by o uh which is meant to give you exposure to private markets.

So I looked at potential opportunities in private markets and there's only a few.

You have crane shares which has bio uh that is subadvised by the man group.

Uh John Lennington and I worked at Russell together so I'm very familiar with that product.

Then there's uh a couple of other potential like the Renaissance IPO which is more midcapy and so is the bio.

They're more in the midcap space kind of speaking to what Mike talked about where things that come to market in the IPO world are coming in as mid and large caps.

Um and so if you're trying to get exposure to that, you got to be in that space.

Um but ultimately I don't have a wild card because there is no wild card that could give you the exposure that you're going to be looking for in these products. uh you have to go into private markets and so you got to look at interval funds and that's where you got to start.

You got to look at venture related interval funds.

One that stands out to me is issued by Kinetic Ventures.

They have a venture uh interval fund that you can invest in, but it is an interval fund.

So limited liquidity.

There really isn't anything in the market anymore that will provide you the exposures that you think you get when you invest in something that's titled micro cap.

So, I have no winner.

But if I have to absolutely choose something from the battle, I'm just going to choose FDM simply because it has, you know, average market cap of a billion.

So, you know, it's on the smaller side and it has excellent performance.

Uh, and it's, you know, more actively managed than the other two.

So, if I h if you put a gun to my head and said you have to choose, it's FDM.

But ultimately, if you want exposure and the attributes that used to exist in micro cap, go look at an interroll fund that invests in venture and there you'll get all the attributes that you would want that used to exist in this space. >> Mike, your final chance to weigh in with your overall winner. >> Yeah.

So, I think uh you know, from a micro cap perspective, I couldn't agree more um in the sense that if you're truly are looking for access to the space, you're not finding it any of the products in today's battle.

That being said, um I do believe in small cap investing and these are smaller cap than most um small cap products out there and I actually don't think that's necessarily a good thing um in terms of allocating to this area of the market.

Um I think um you know FDM is my winner for this and it's because um of those quality aspects.

It's a smaller portfolio.

It's tight.

It's it's more robust screening I guess if you will or more restrictive. it comes down to smaller limited number of companies that qualify.

I talked about that profitability ratio at the beginning.

For all those reasons, FDM wins this this lineup.

Um I think Avantis will be similar in some of their screens that they apply.

It's, you know, it's technically active, but it's not active in the sense that it's a pure screening quant straight strategy.

I think it can get you similar kind of core exposure.

But if I'm truly looking for a long-term allocation to this space, um I'm excited um covering the ETF market and seeing some of the traditional um managers come to market with truly active products.

And I this is an area you want to look at true active.

They're they're being legitimate with their pricing.

I mean, you can get true active and 30 to 50 basis point in the small cap space.

If you go look at their mutual funds, many of them have long-term history of outperforming.

So, if you want kind of that higher beta um aspect of small cap, go look at some of the the active ETFs.

We work with a lot of them.

Um so, I'm not going to start listing off tickers.

Um but I think, you know, you can go out and you can screen for some of the true active.

And when you do that, you know, screen on active share, see how much they look like the overall benchmarks, screen on things like profitability ratios, screen on, you know, valuation, relative valuation, things like that.

And I think you're going to find there's some good opportunity sets for true active small cap investing.

Um but uh this none of these are going to be micro cap nor as an ETF should they be. >> Well, our judges have spoken and according to my final battle scorecard, today's winner is FDM from First Trust.

And that was Shaina's choice by default not really a a strong choice for her.

Her point was maybe you want to go with interval funds. maybe you want to go with actively managed solutions uh in this space.

Mike making a similar point and uh also profitability that really struck me.

FDM was also Mike's choice.

Over 80% of the companies held inside the portfolio are profitable and that certainly is something that um you know you want to look for uh with with any type of company but especially in this space.

Great job to both of our judges for breaking it down and um keep up the good work.

We couldn't have done it without you. >> Thank you so much for having me. >> Thanks, Ron.

It's great being here. >> Well, be sure to visit the description section below.

We've got research links to both of our judges, so get in touch.

And while you're down there, check out the link to our program sponsor direction.

So, which ETF battle would you like to see on our next episode?

Hit me up with your ETF ticker symbols in the comments section below or on our X feed at ETFGUID.

Thanks for watching.

I'm Ronda Ley.

We'll see you on the next show.