FNDA: Reasons To Add Small Caps, But These Other Funds May Outperform

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Schwab Fundamental U.S. Small Company Index ETF is a hold due to mixed factors affecting its prospects.Small caps historically perform well during times of reducing interest rates and early bull ...

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They are also currently favorably valued.FNDA has the highest price-to-earnings ratio and expense ratio among comparable peer funds.   PogoniciInvestment Thesis Schwab Fundamental U.S. Small Company Index ETF  is a hold due to multiple mixed factors affecting the prospects for the fund. While historically the addition of small caps to an overall portfolio is beneficial, small caps also do well in times of reducing interest rates and early bull markets. Additionally, small caps are currently favorably valued in comparison to the market overall. However, FNDA has the highest price-to-earnings ratio and the highest expense ratio of comparable peer funds. Introduction: Why Even Invest in Small Cap Stocks?","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"LU1074936037.SGD":"JPMorgan Funds - US Value A (acc) SGD","IVV":"标普500指数ETF","LU0256863811.USD":"ALLIANZ US EQUITY \"A\" INC","SPY":"标普500ETF","SCHA":"Schwab US Small-Cap ETF","IE00B775SV38.USD":"NEUBERGER BERMAN US MULTICAP OPPORTUNITIES \"A\" (USD) ACC","BK4550":"红杉资本持仓","BRK.B":"伯克希尔B","BK4588":"碎股",".SPX":"S&P 500 Index","IE00B3S45H60.SGD":"Neuberger Berman US Multicap Opportunities A Acc SGD-H","IJR":"标普小型股600指数ETF-iShares","OEX":"标普100","LU0417517546.SGD":"Allianz US Equity Cl AT Acc SGD","LU0053666078.USD":"摩根大通基金-美国股票A（离岸）美元","UPRO":"三倍做多标普500ETF","IJR.AU":"ISHARES S&P SMALL CAP ETF/AU","FDN":"First Trust Dow Jones Internet I","FNDA":"Schwab Fundamental U.S. Small Co","IE00B1XK9C88.USD":"PINEBRIDGE US LARGE CAP RESEARCH ENHANCED \"A\" (USD) ACC","BK4504":"桥水持仓","LU1280957306.USD":"THREADNEEDLE (LUX) US CONTRARIAN CORE EQUITIES \"AUP\" (USD) INC","SDS":"两倍做空标普500ETF","OEF":"标普100指数ETF-iShares","SH":"标普500反向ETF","VB":"小型股指数ETF-Vanguard MSCI","LU1363072403.SGD":"Fidelity Global Financial Services A-ACC-SGD","SSO":"两倍做多标普500ETF","SPXU":"三倍做空标普500ETF","LU0130102774.USD":"Natixis Harris Associates US Equity RA USD","LU0971096721.USD":"富达环球金融服务 A"},"translate_title":"FNDA：增加小盘股的理由，但这些其他基金可能会跑赢大盘","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"VB":1,"SCHA":1,"IJR.AU":1,"IJR":1,"FNDA":1,"SPY":0.9,"FDN":0.87,"BRK.B":0.78,"US10Y.BOND":0.61,"US12M.BOND":0.61,"US2Y.BOND":0.61,"US30Y.BOND":0.61,"US3Y.BOND":0.61,"US7Y.BOND":0.61,"US6M.BOND":0.61,"US5Y.BOND":0.61,"SDS":0.6,"SSO":0.6,"UPRO":0.6,"US912797HH31.BOND":0.6,"US912796CX52.BOND":0.6,"US912797FH58.BOND":0.6,"US912797FS14.BOND":0.6,"US912797GB79.BOND":0.6,"US912797HG57.BOND":0.6,"US912797GK78.BOND":0.6,"US912797GL51.BOND":0.6,"US912797GW17.BOND":0.6,"US912797HE00.BOND":0.6,"ESmain":0.6,"IVV":0.6,"SPXU":0.6,"OEF":0.6,"OEX":0.6,".SPX":0.6,"SH":0.6},"content_text":"Schwab Fundamental U.S. Small Company Index ETF is a hold due to mixed factors affecting its prospects.Small caps historically perform well during times of reducing interest rates and early bull markets. They are also currently favorably valued.FNDA has the highest price-to-earnings ratio and expense ratio among comparable peer funds.   PogoniciInvestment Thesis Schwab Fundamental U.S. Small Company Index ETF (NYSEARCA:FNDA) is a hold due to multiple mixed factors affecting the prospects for the fund. While historically the addition of small caps to an overall portfolio is beneficial, small caps also do well in times of reducing interest rates and early bull markets. Additionally, small caps are currently favorably valued in comparison to the market overall. However, FNDA has the highest price-to-earnings ratio and the highest expense ratio of comparable peer funds. Introduction: Why Even Invest in Small Cap Stocks? During Berkshire Hathaway’s 2020 annual meeting, Warren Buffett famously said, “in my view, for most people, the best thing to do is own the S&P 500 index fund.” While this simplistic advice for long-term buy-and-hold investors is well founded, it excludes the benefits of small caps. As we will discuss in the article, adding small caps can be quite beneficial to long term returns. This is particularly true during times of lowering interest rates and economic expansion. Therefore, let us further examine FNDA and several comparable peer funds to explore their unique qualities. Fund Overview and Compared ETFs FNDA is a passive exchange traded fund that seeks to track the Russell RAFI U.S. Small Company Index. With its inception in 2013, the fund has 1,011 holdings and $8.16B in AUM. FNDA is a small blend fund with a mix of growth and value holdings. The fund’s largest sectors by weight are industrials (19.97%), followed by financials (17.25%) and consumer discretionary (15.88%). Of note, this sector mix is distinctly different from the S&P 500 Index which is notably heavy on information technology at 29.80% weight. For comparison purposes, other funds examined are Vanguard Small-Cap ETF (VB), iShares Core S&P Small-Cap ETF (IJR), and Schwab U.S. Small-Cap ETF (SCHA). While each of these funds has different tracked indexes, they were chosen due to their similarities with FNDA including their small cap blend strategy with high diversification. Additionally, each fund is passively managed with over $5B in AUM. Performance, Expense Ratio, and Dividend Yield FNDA has seen an annualized 10-year return of 8.62%. Therefore, the fund has underperformed its tracked index but outperformed the Russell 2000 Index, which has seen a 10-year average return of just 7.07%, including dividend reinvestment. By comparison, VB has a 10-year average annual of 8.94%, IJR has a 10-year average annual return of 8.76%, and SCHA has seen a 10-year annualized return of 7.78%.   10-Year Total Price Return: FNDA and Peer Small Cap Funds (Seeking Alpha)A key drawback for FNDA’s expense ratio. Despite being a passively managed fund, FNDA has an expense ratio of 0.25%, the highest among peer funds. All small-cap ETFs examined have a notable dividend yield between 1.32% and 1.45%. Additionally, each fund’s dividend yield has been growing over the past five years. Expense Ratio, AUM, and Dividend Yield Comparison     FNDA VB IJR SCHA   Expense Ratio 0.25% 0.05% 0.06% 0.04%   AUM $8.16B $145.28B $78.43B $16.62B   Dividend Yield TTM 1.38% 1.45% 1.31% 1.34%   Dividend Growth 5 YR CAGR 6.97% 8.09% 4.92% 6.42%   Click to enlarge Source: Seeking Alpha, 10 Apr 24 FNDA Holdings and Outlook for Small Cap ETFs FNDA, along with other small cap funds examined, have a high amount of diversification. As a result, FNDA’s top 10 holdings weight is relatively low at just 3.88%. Because each fund has different tracked indexes, their top holdings are all considerably different as listed below. Top 10 Holdings for FNDA and Peer Small Cap Funds   FNDA – 1,011 holdings VB – 1,421 holdings IJR – 676 holdings SCHA – 1,729 holdings   COIN – 0.58% SMCI – 0.75% XTSLA – 2.06% MSTR – 0.69%   SMCI – 0.49% BLDR – 0.44% FN – 0.59% NTNX – 0.44%   ANF – 0.45% VRT – 0.42% ENSG – 0.58% FIX – 0.32%   SATS – 0.41% DECK – 0.42% ATI – 0.56% NTRA – 0.30%   RCL – 0.40% TRGP – 0.40% SPSC – 0.55% WING – 0.29%   AGO – 0.32% AXON – 0.40% ANF – 0.54% THC – 0.29%   XPO – 0.32% PTC – 0.38% SM – 0.52% TXRH – 0.28%   DBR – 0.31% ENTG – 0.37% MLI – 0.52% CNM – 0.28%   SPOT – 0.31% BAH – 0.35% BCC – 0.51% BWXT – 0.26%   OMI – 0.30% RS – 0.34% MTH – 0.51% X – 0.26%   Click to enlarge Source: Multiple, compiled by author on 10 Apr 24 Because FDNA has such a small weight on each holding, it is unlikely that any top holding will result in a significant change in performance for the fund. Instead, we must look at the macro-level factors for small caps in general. In looking at the small cap forecast overall, we can note three distinguishable qualities. The first is the historical performance of small caps when added to an overall portfolio. The second is how small caps perform in times of reducing interest rates. The third is the returns of small caps during economic growth. Each of these factors are discussed in further detail below. Historic Outperformance of Small Caps To answer our original question on whether an investor even needs small cap stocks, we can first look at historic performance. In fact, over the period of 1975 to 2023, small caps outperformed large caps roughly 90% of the time over rolling 15-year time periods. However, even a look-back over 40 years might not be sufficient for some small cap critics. If we look back at an even larger window of 1926 to 2013, we still see the strong performance of small caps.   CRSP Index Performance Comparison, 1926-2013 (The American Association of Individual Investors)In fact, over this almost 90-year period, we see roughly 2% greater performance for small caps compared to large caps. We do, however, see increased volatility as measured by standard deviation. Although history has proven the strong performance of small caps, let us look at more recent indicators next. Lowering Interest Rates Small caps stocks are typically reliant on greater debt for growth. Therefore, high interest rates result in tough times for small caps. Large caps typically have larger cash reserves to weather times of high interest rates. While the exact timing and amount of interest rate cuts by the U.S. Federal Reserve is unknown, it is widely expected that there will be at least one cut in 2024 with more though 2025. Therefore, a favorable environment could be on the horizon for small caps making FDNA and peer funds attractive. New Bull Markets and Economic Growth Finally, small caps see strong growth during times of economic growth and the beginning of bull markets. Typically, small cap holdings have greater growth potential than large caps that have already seen strong growth and are now matured. However, is this period of economic growth applicable currently? The forecast says not particularly. Real GDP growth of 2.4% this year forecasted and 1.4% in 2025. By comparison, the average GDP growth between 1930 and 2021 was 3.28%. Therefore, while the expected economic growth may avert a recession, it is hardly spectacular. Current Valuation  Over the past year, FNDA has seen an average performance compared to peers. However, all funds have underperformed “the market” overall, as measured by the S&P 500 which has seen a one-year return of over 26%. So, was Warren Buffett right after all? Should investors simply invest in an S&P 500 Index fund and not worry about small caps? To answer this, let us look at each funds’ valuation.   One Year Performance of FNDA and Compared Small-Cap ETFs (Seeking Alpha)Upon examining each fund’s price-to-earnings ratios, we can see that all funds have ratios significantly lower than the S&P 500 Index. The current P/E ratio for the S&P 500 Index is 28.28, while the small cap funds examined range from 13.46 to 15.12. Therefore, one can reasonably conclude that while the small cap funds have seen recent underperformance there is strong potential for returns looking forward. Despite this quality, FNDA has the least desirable P/E ratio of small cap funds compared. Valuation Metrics for FNDA and Peer Competitors     FNDA VB IJR SCHA   P/E ratio 15.12 14.87 13.46 14.43   P/B ratio 1.59 1.89 1.70 2.02   Click to enlarge Source: Compiled by Author from Multiple Sources, 10 Apr 24 Risks to Investors Small cap companies represent several risks compared to large caps. As discussed, small caps are more sensitive to increasing interest rates. This is because of their use of debt to achieve greater growth and their comparatively lower amounts of cash compared to large caps. Most commentators generally expect an interest rate reduction in June 2024 and continuing through 2025. However, inflation and job report data could result in delayed or no cuts at all this year. While this scenario is unlikely, if realized it will hit small caps particularly hard. Concluding Summary  Despite small caps' recent underperformance compared to the market overall, they have historically outperformed. This has resulted in current valuations being quite attractive for small cap funds such as FNDA. However, FNDA has the highest expense ratio with least desirable valuation compared to peer funds. By contrast, Vanguard’s small cap fund, VB, offers a lower expense ratio, stronger track record of performance, and lower P/E ratio. While there are risks to all small cap funds compared including unknowns surrounding interest rate cuts and the U.S. economic forecast, I am optimistic about the near-term prospects for small caps. However, FNDA would not be my top choice for small cap funds.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2426720764"}