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.
On today's episode of ETF Battles, we're going to examine an audience requested triple header between micro cap/small cap ETFs from BlackRock, 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.
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Today's triple header was requested by a longtime viewer named Keith, and he's got the username ke. This time it's between micro caps, small cap ETFs. It's a skirmish between BlackRock, First Trust, and Avantis. 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?
Judging today's triple header is a duo extraordinaire. We've got Shaina Sissel with Bambrian Capital Management and Mike Akins with ETF Action joining us. >>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.
We're going to blaze through our four battle categories one at a time and give you an opportunity to weigh in. 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 battle outcomes 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 winner. The Avantis small cap fund has the lowest expense ratio at 25 basis points. It has the lowest spread for trading at 13 cents. It also is sizable assets at about $1.4 billion. And for those reasons, this is a pretty easy answer. It is 100% this fund. The other two funds are the same expense ratio, 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. Avantis is 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 that might be better for tactical players, but in this battle Avantis 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. Some more small cap kind of enter that micro cap. Whether they're traditionally truly market cap or not is up for debate. 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?
In my mind there's one product that jumps out ahead of 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 companies inside the portfolio have positive net income over the past 12 months whereas if you look at something like IWC 46% so over 50% of the companies in that portfolio lost money last year 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 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. 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. But none of these are micro cap funds. I want to start there. 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.
Micro cap is inherently difficult to trade. It actually has very limited liquidity and all of these funds use liquidity stream screens. But on top of that, if you look at the bottom 20% of Del of all US market cap stocks, and FDM says that they look to invest in the bottom 20% of stocks that trade on the NYSE or the NASDAQ. If you just look at that, the market cap of those names whether they trade on an index or not, 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.
Micro caps inherently have attributes to them that make them unusual 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. So these are all small cap funds. And with that in mind, I agree with Mike in that the FDM, the first trust product, seems to have the clearest screens and also generally speaking has an average market cap of the securities under in the portfolio that I can get behind as being like the smallest of the small cap at 1 billion, right?
IWC it's 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 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. 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 and the way they're going about and approaching the space. So 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 performance? >>Starting by saying the Avantis fund doesn't have the longest track record in the world. It was launched in 2022. While the other two have very long track records, they have 20 years of history here. When I look at the performance 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 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. 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, liquidity, liquidity, what are you referring to? Just familiarize some of our audience members 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 requirement for these daily liquid publicly traded products, whether it be a mutual fund or an ETF. You need to be able to liquid...
