Below we present the list of 5 Best Performing Small-cap ETFs in 2023. For our methodology and a more comprehensive list please see 10 Best Performing Small-cap ETFs in 2023.
5. Future Innovators ETF (BFTR)
Year-to-Date Returns: 17.2%
The Future Innovators ETF (BFTR) ranks fifth on our list of best performing small-cap ETFs, gaining over 17% this year. The BlackRock managed fund, which has a 0.80% expense ratio, seeks out innovative and disruptive small- and mid-cap companies that are expected to play vital roles in the economy of tomorrow. The fund manages $6.81 billion in assets which are spread across a concentrated portfolio of 63 holdings.
The fund’s top holding at 3.88% weighting is technology and weapons manufacturer Axon Enterprise, Inc. (NASDAQ:AXON). The company has received strong support for its new TASER 10 among law enforcement, as well as its Axon Body 4 body camera, which was released in June. The company has also been aggressively investing in AI as it fleshes out an ecosystem of cameras and sensors that collect customer data with the goal of providing insights that will lead to the creation of more advanced public safety tools.
Axon Enterprise, Inc. (NASDAQ:AXON) grew revenue by more than 30% for the sixth-straight quarter in Q2, with its cloud business growing sales by 62% year-over-year. The company is bullish on the long-term growth trajectory of its software business, which currently has low but growing adoption among customers.
The Conestoga Small Cap Strategy commented on Axon Enterprise, Inc. (NASDAQ:AXON)’s robust growth in its second quarter 2023 investor letter:
“Axon Enterprise, Inc. (NASDAQ:AXON)’s fundamentals remain robust but suffered from profit taking in the second quarter after strong performance from the stock over the last year. AXON is a public safety technology company and has been a portfolio leader in each of the three prior quarters. AXON’s fundamentals remain robust, with revenue growth of 34% in their most recently reported quarter. AXON is seeing robust growth internationally and in their Fleet product line, and the new Taser 10 is seeing the strongest initial demand in their history.”
4. Motley Fool Small-Cap Growth ETF (TMFS)
Year-to-Date Returns: 17.7%
The Motley Fool Small-Cap Growth ETF (TMFS) provides exposure to small-cap companies that the fund believes are underappreciated, with an emphasis on their long-term growth trajectories. The fund holds just 31 high conviction stock picks, which it scans for through its proprietary 4-point Quality framework. The ETF has an expense ratio of 0.85%.
The ETF’s top holding at 5.40% weighting is home and business security company Alarm.com Holdings, Inc. (NASDAQ:ALRM). The company grew revenue by 13.3% year-over-year in Q2 excluding the impact from Vivint (more on that below), along with $36.4 million in adjusted EBITDA. The company released the first battery-free video doorbell during the second quarter, which it anticipates strong demand for, particularly in the north and southwest given its wide operating temperature range.
Alarm.com Holdings, Inc. (NASDAQ:ALRM) is currently embroiled in a lawsuit with former customer Vivint, which it says is violating 15 of its patents now that the company is no longer paying licensing revenue to Alarm.com. Vivint has stated that it is no longer required to pay licensing revenue to Alarm.com given the Patent Cross License Agreement between the two companies. However, that agreement was executed back in 2013, with Vivint paying licensing fees ever since, until late last year.
Polen Capital was sticking with Alarm.com Holdings, Inc. (NASDAQ:ALRM) despite some of its recent headwinds, as revealed in its Q4 2022 investor letter:
“Alarm.com Holdings, Inc. (NASDAQ:ALRM), a cloud-based provider of remote control, home automation, and security monitoring services, shares were down on a weaker-than-expected initial outlook for FY23. Additionally, the company is going into arbitration with customer Vivint, which has stopped paying them licensing revenue, which is a roughly 3% headwind to the top line. While we continue to monitor these developments closely, this is a very stable business that has historically been able to grow through more challenging macro backdrops, given the stickiness of its core SaaS revenue.”
3. Pacer US Small Cap Cash Cows 100 ETF (CALF)
Year-to-Date Returns: 18.3%
The Pacer US Small Cap Cash Cows 100 ETF (CALF) has a very simple and clear strategy when it comes to portfolio construction. It scans the companies in the S&P SmallCap 600 for those with the highest free cash flow yields and bundles the top 100 of those companies into this ETF. The ETF has $3.35 billion in assets and sports a 0.59% expense ratio.
Topping the list of those 100 companies in its portfolio is Patterson-UTI Energy, Inc. (NASDAQ:PTEN) with a weighting of 2.89%. The company, which provides equipment and services to clients operating in the oil and gas industry, has been cash flow positive for four straight quarters and delivered a positive free cash flow yield for the last two quarters. After posting a FCF yield of 3.5% in the first quarter, that figure jumped to 7.8% in Q2.
There was a 26% rise in hedge fund ownership of Patterson-UTI Energy, Inc. (NASDAQ:PTEN) during the second quarter, though the smart money nonetheless remains far less bullish on the company than they were prior to 2019. Ben Jacobs’ Anomaly Capital Management more than doubled its stake in PTEN during Q2, giving it 6.01 million shares.
Bernzott Capital Advisors US Small Cap Value believes Patterson-UTI Energy, Inc. (NASDAQ:PTEN) will benefit from favorable market conditions in the future, as relayed in its Q1 2023 investor letter:
“Patterson-UTI Energy, Inc. (NASDAQ:PTEN): PTEN is a leading supplier of contract land drilling and pressure pumping services primarily in the United States. Their portfolio of high-spec rigs should garner superior day rates driving robust return of capital in the form of dividends and share repurchases. The disciplined nature of capital deployment overall in the industry should keep market conditions very favorable for the foreseeable future.”
2. iShares MSCI Brazil Small-Cap ETF (EWZS)
Year-to-Date Returns: 21.3%
The top two spots on the list are claimed by Brazilian-based small-cap ETFs, beginning with the iShares MSCI Brazil Small-Cap ETF (EWZS). The fund provides investors with exposure to Brazilian small-cap stocks, 72 in all, and more accurately represents the Brazilian economy as a whole than the EWZ ETF. It has an expense ratio of 0.58%.
The fund’s top holding is the Brazilian-traded shares (EMBR3) of Embraer S.A. (NYSE:ERJ), which have climbed by 36% this year. The Brazilian aerospace company is one of the largest producers of commercial aircraft in the world, trailing only industry titans The Boeing Company (NYSE:BA) and Airbus.
Embraer S.A. (NYSE:ERJ) delivered 47 jets in the second quarter, which represented a 47% year-over-year jump. Unsurprisingly, revenue growth was equally strong, rising by 57% year-over-year when it came to commercial aircraft and by 42% in executive. The company also maintained a stable backlog of $17.3 billion.
1. VanEck Brazil Small-Cap ETF (BRF)
Year-to-Date Returns: 27.7%
Topping the list with nearly 28% gains in 2023 is the VanEck Brazil Small-Cap ETF (BRF), which has 102 holdings, providing slightly more exposure to the Brazilian market than EWZS. Its expense ratio is also slightly higher at 0.66%. The fund is relatively top-heavy, with about 40% of its assets invested in its top 15 holdings.
One of those holdings is Ero Copper Corp. (NYSE:ERO), its sixth-largest holding at 2.85% weighting. The copper producer isn’t overly popular among the smart money, as just ten funds were long ERO on June 30. One fund did add ERO to its portfolio during Q2, that being Dmitry Balyasny’s Balyasny Asset Management.
Softer copper prices impacted Ero Copper Corp. (NYSE:ERO)’s Q2 results, though the company noted that was the result of global economic concerns rather than the fundamentals of the copper industry, which look strong. Demand is rising and should continue to intensify alongside the ongoing global shift towards clean energy sources. Ero Copper is actively planning to meet that growing global demand with new sites, including one at Tacuma in the northern part of the country that is about 50% complete, with production expected to commence by the second half of 2024.
Insider Monkey focuses on uncovering the best investment ideas of hedge funds and insiders. Please subscribe to our free daily e-newsletter to get the latest investment ideas from hedge funds’ investor letters by entering your email address below. For more of the latest stock picks worth considering for your portfolio, check out Goldman Sachs Growth Stocks: Top 12 Stocks and 11 Cheap Small-Cap Stocks to Buy Before the Next Breakout.
Disclosure: None.
