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First Cut ETFs

Small ETFs That Are Outperforming

Due to the top-heavy nature of the ETF industry, smaller funds with favorable performance records can be overlooked.

by Charles Rotblut | July 2020

Charles Rotblut leads a class in AAII's new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.


Exchange-traded funds (ETFs) are lopsided in terms of size. The largest ETFs have a disproportionate amount of assets under management (AUM). These ETFs also tend to be the most familiar funds.

Due to the top-heavy nature of the ETF industry, smaller funds with favorable performance records can be overlooked. This is particularly the case with ETFs focusing on a broad category of stocks instead of specific sectors.

To identify such overlooked ETFs, two key criteria are used. The first is size. ETFs making this First Cut are required to have AUM of no more than $500 million. This number is small enough to find funds that are potentially flying under the radar. Note that ETFs with AUM below $100 million are generally at greater risk of being closed.

The second is performance. The passing ETFs were required to have outperformed their peers over the past three years. This identifies funds with more recent outperformance without overly emphasizing very short-term performance. It also eliminates ETFs in existence for a shorter period of time from being considered.

A daily average trading volume of 10,000 shares or more was required to ensure that there was a minimum level of liquidity. Leveraged and inverse funds were excluded because their returns may be attributable to the higher level of risk taken as opposed to the strategy itself.

More than half of the passing ETFs target large-cap stocks. All but two are index funds. Many follow subsets of well-known indexes, though some follow specialized or thematic strategies.

The table presents a list of the 20 small but outperforming ETFs wth the highest three-year annual return.

A+ Investor subscribers can access this and all of our ETF First Cut screens online to see current results.

Discussion

THOMAS L from FL posted over 6 years ago:

Any opinions on small (new) ETF symbol WFH?


STEVEN R from KY posted over 6 years ago:

This is an excellent little article and we appreciate you bringing this to our attention. Small ETF's are a great option.


JAMES H from TN posted over 6 years ago:

Given our long former bull market, is 3 years of profit a wise choice for small ETF; in fact for us older investors would the larger ETF, be more safe? I am just old enough I am not certain any investment has great safety. My own experience,however, is that MR. C. R. brings frequent wisdom to us members.


CHARLES H from WA posted over 6 years ago:

Charles Rothblut. In a future article please discuss the 5 or more ETFs run by ARK. I found them great performers albeit more volatile along with their higher returns.


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