Pieter Slegers — ETF Portfolio Update: February 2026 (Compounding Quality)

One-line take: the monthly ETF issue, and the clearest worked example in the archive of refining a factor rather than just buying it. The setup is two facts stacked: small caps have beaten large caps by 1.8% a year ($10,000 over twenty years → $89,800 against $64,870), and they are now cheaper than large caps by the widest margin in 25 years — small caps 32% cheaper, mid caps 29% cheaper, having traded at a premium from 2004 to 2020. The objection is raised against the obvious implementation: the Russell 2000 "includes a lot of unprofitable companies." The fix is three screens stacked — small, positive free cash flow, high returns on capital — which he labels "Small-High Quality." The ETF of the Month is SCOW (Pacer S&P SmallCap 600 Quality FCF Aristocrats, TER 0.59%, North America only): from 600 small US companies, keep only those profitable seven years running, then rank on cash conversion and return on capital, and buy the best 80. The actual transaction is smaller than the essay: $500 into VB and €500 into IUSN. Both books are disclosed transaction by transaction — the American at a 14.1% CAGR ($10,346.84), the non-American at 18.5% ($10,976.71).

1. Stocks & names mentioned

Two purchases (VB, IUSN.DE) and the ETF-of-the-Month spotlight (SCOW) are Positive. Existing book holdings disclosed with their purchase history are Neutral — they are reported, not re-rated. ETFs get SA·STK research links (Qualtrim has no fund pages); European lines link to their local listing. The WisdomTree Emerging Markets Multifactor, Tema Durable Quality, iShares S&P 500 Equal Weight, iShares Edge MSCI World Multifactor and iShares Core MSCI Emerging Markets lines are named in the transaction sheets without tickers and are left to the talking points, as are SCOW's top-ten underlying holdings. Written post with no timestamps — the At link opens the article.

Stance = how each line is framed in this post. Five ETFs appear in the transaction sheets under fund names without tickers (WisdomTree Emerging Markets Multifactor, Tema Durable Quality, iShares S&P 500 Equal Weight, iShares Edge MSCI World Multifactor, iShares Core MSCI Emerging Markets) and are covered in the talking points rather than given rows. SCOW's disclosed top-ten holdings — Jackson Financial, InterDigital, MarketAxess, Enova, Etsy, Enphase, Magnolia Oil & Gas, Bread Financial, Box, NMI — are the fund's positions, not Compounding Quality's, and are likewise left to the talking points.

2. Talking points

Ticker	Name	Research	View	What he said	At
SCOW	Pacer S&P SmallCap 600 Quality FCF Aristocrats ETF	SA · STK	Positive	ETF of the Month (spotlight) — not purchased. TER 0.59%, physical, ISIN US69374H2206, "only available for investors in North America." The screen is three-stage: "The ETF looks at 600 small American companies. It only selects the ones that have been profitable 7 years in a row," then ranks on "How much cash does the company keep from every dollar it makes?" and "How good is the company at turning money into more cash?", and "finally, the ETF buys the 80 best companies." Result: "Much higher profit margins" and "much better capital allocation skills (high ROIC)" than the average S&P 600 constituent. Information Technology 25.75% and Financials 23.97% are almost half the fund; the top ten are 39.44% of it.	read ↗
VB	Vanguard Small-Cap ETF	SA · STK	Positive	BOUGHT — $500 at tomorrow's open, stated price $278. The American half of the small-cap add, taken on the 25-year-wide valuation gap ("Small Caps: 32% cheaper than large caps"). The fourth purchase of this line: December 2023 at $212.8 (+30.35%), March 2024 at $224.6 (+23.51%) and October 2024 at $242.7 (+14.27%), all now marked at $277.35 — so the add is at the highest price of the four, into the cheapest relative valuation.	read ↗
IUSN.DE	iShares MSCI World Small Cap UCITS ETF	STK	Positive	BOUGHT — €500 at tomorrow's open, stated price €8.36. The non-American twin of the VB purchase; the split exists purely for access ("If you live in the US, you can't buy non-US ETFs. And if you live outside the US, you can't buy US ETFs"). Also its fourth purchase: November 2023 at €5.62 (+46.51%), April 2024 at €6.37 (+29.24%) and October 2024 at €6.85 (+20.20%), all marked at €8.23 — note the marked price is below the €8.36 he is paying.	read ↗
RSP	Invesco S&P 500 Equal Weight ETF	SA · STK	Neutral	Disclosed holding, not re-rated. The American book's oldest and best position: bought October 2023 at $140.3 (+44.16%), May 2024 at $164.0 (+23.36%) and July 2025 at $184.75 (+9.48%), marked at $202.26. Three of seventeen transactions in the book.	read ↗
MOAT	VanEck Morningstar Wide Moat ETF	SA · STK	Neutral	Disclosed holding, not re-rated. Two purchases: November 2023 at $73.5 (+43.58%) and April 2024 at $85.8 (+23.02%), marked at $105.53 — the second-best line in the American book. It is topped up again in May and August.	read ↗
XMHQ	Invesco S&P MidCap Quality ETF	SA · STK	Neutral	Disclosed holding, not re-rated. Two purchases: January 2024 at $89.4 (+21.87%) and July 2024 at $96.9 (+12.48%), marked at $108.95. The mid-cap expression of the same size-plus-quality idea the SCOW spotlight argues for at the small end.	read ↗
USMV	iShares MSCI USA Min Vol Factor ETF	SA · STK	Neutral	Disclosed holding, not re-rated. The American book's weakest line: one purchase, April 2025 at $90.70, marked at $96.03 for +5.88%. It is topped up in July 2026 on an explicit high-vol/low-vol spread argument.	read ↗
GOAT.AS	VanEck Morningstar Global Wide Moat UCITS ETF	STK	Neutral	Disclosed holding, not re-rated. Three purchases: December 2023 at €23.58 (+38.57%), March 2024 at €25.25 (+29.40%) and March 2025 at €29.50 (+10.76%), marked at €32.67. The non-American twin of MOAT.	read ↗
MVOL.L	iShares Edge MSCI World Minimum Volatility UCITS ETF	STK	Neutral	Disclosed holding, not re-rated. Two purchases: April 2025 at €62.63 (+19.91%) and August 2025 at €62.32 (+20.51%), marked at €75.10. The non-American twin of USMV — and notably far ahead of it, the widest divergence between the paired books.	read ↗

Four roads, pick the one you can hold

"On the stock market, there are multiple roads that lead to heaven": Quality ("only invest in companies that have already won"), Size ("the smaller the better"), Multifactor ("Quality, Size, Value & Momentum") and Emerging Markets.
"All these different strategies outperform the market over time. You should pick the strategy and investment style you feel the most comfortable with" — the same temperament-over-optimality argument made a week earlier with Greenblatt.

The size premium, quantified

"The smallest companies outperformed large caps by 1.8% per year on average."
Compounded over twenty years on $10,000: large caps $64,870 (9.8%), small caps $89,800 (11.6%). The gap in the annual rate is small; the gap in the outcome is 38%.

The valuation gap, and its history

"Mid Caps: 29% cheaper than large caps. Small Caps: 32% cheaper than large caps."
The historical frame is what makes it a claim rather than a data point: "Between 2004 and 2020, smaller companies traded at a premium. Today, smaller companies trade at the lowest relative valuation in 25 years. Since 2020, the valuation gap has only become wider."
"I think the market is in an exaggeration phase for many large caps" — the mirror image of the quality-versus-market argument running through the whole February archive.

The objection to the obvious trade

"If you want to keep it easy, you could just buy the Russell 2000… But there is a problem with this index. It includes a lot of unprofitable companies."
This is the pivot of the issue: the factor is right, the standard vehicle is contaminated. A cap-weighted small-cap index buys the discount and the loss-makers together.

Free cash flow, defined from first principles

"Income is an opinion. Cash flow is a fact." Then the definition in two lines: Free Cash Flow = Operating Cash Flow − CapEx, with CapEx described as "the money the company spends to keep the business running."
The first filter follows directly: "we are looking at small caps with a positive Free Cash Flow. This is already a great improvement from the Russell 2000."

Five uses of cash, and the one that matters

Pay down debt · reinvest · acquire · pay dividends · buy back shares. "The most attractive option? Option number 2. You want companies to reinvest heavily in their own future growth."
Hence the second filter — high returns on capital — and the label: "You could define it as 'Small-High Quality'."
Worth noting the tension with the rest of the archive, where dividends and buybacks are repeatedly counted as return (Visa's 3.1% shareholder yield, Evolution's 8-10%, Adobe's buyback). Here they rank fourth and fifth.

SCOW: the screen in three stages

Universe: the 600 companies of the S&P SmallCap 600 — itself already a profitability-screened index, unlike the Russell 2000.
Filter: profitable seven years in a row. Rank: cash retained per dollar of revenue, and cash generated per dollar invested. Select: the best 80.
Concentration is the trade-off: Information Technology 25.75% plus Financials 23.97% is nearly half the fund, and the top ten holdings are 39.44% — with Jackson Financial alone at 6.29%.
The top ten also shows what a backward-looking cash screen actually buys: an annuity insurer, a patent licensor, a bond-trading venue, two consumer lenders, Etsy, Enphase, an oil and gas producer, Box and a mortgage insurer. High free cash flow, but several of them cyclical and none obviously "boring and unreplaceable" in the sense of the 17 February issue.

Two books, seventeen transactions each, fully disclosed

American book: $10,346.84, a 14.1% CAGR since October 2023. Non-American: $10,976.71, 18.5%. "Our Non-American ETF Portfolio is currently slightly outperforming the American one… Over time, I expect both portfolios to generate similar returns."
Every purchase is listed with date, quantity, price, current price and profit — a €500 or $500 ticket roughly every six to eight weeks since October 2023, rotating across the four factors.
The best single line in either book is the non-American iShares Edge MSCI World Multifactor, bought January 2024 at €9.07 and marked at €14.36 (+58.32%). The weakest is USMV at +5.88%.

The transaction versus the essay

The spotlight argues for a specific refinement of the small-cap trade — profitable, high-ROIC small caps via SCOW — and then buys two broad, unscreened small-cap funds instead: VB ($500) and IUSN (€500).
The stated reason for not buying SCOW is access ("only available for investors in North America"), which explains the non-American half but not the American one.
Note the price detail on IUSN: the sheet marks the existing holding at €8.23 while the new purchase is quoted at €8.36.

3. In plain English

A jargon-free summary of the thesis behind each argued line. (Renders on each name's consolidated page.)

SCOW — Pacer S&P SmallCap 600 Quality FCF Aristocrats ETF Positive

The idea behind this fund is a fix for a known problem. Small companies have historically beaten large ones — by about 1.8% a year, which compounds into a large gap over twenty years — and they are currently cheaper relative to large companies than at any point in 25 years. But the usual way to buy them, a broad small-cap index like the Russell 2000, hands you the loss-makers along with the bargains.

SCOW screens them out in three steps. It starts from 600 small American companies, keeps only those that have made money seven years running, then ranks the survivors on two things: how much of each dollar of sales they keep as cash, and how much extra cash they generate from the money they invest. The best 80 make the fund. The result is a portfolio with much higher margins and much better returns on capital than the average small company — a "Small-High Quality" screen rather than a size bet.

Two things to weigh. The fund costs 0.59% a year, which is expensive against a plain index fund, and it is concentrated: technology and financials are almost half of it, and the ten largest positions are nearly 40%. Also worth noticing — Slegers spotlights it but does not buy it. He cites availability (North America only), and buys two ordinary small-cap funds instead.

VB — Vanguard Small-Cap ETF Positive

IUSN.DE — iShares MSCI World Small Cap UCITS ETF Positive

Summary derived from the archived Compounding Quality post (text and transcribed spreadsheet images in transcript.txt) for personal study. Not investment advice. © Compounding Quality / Pieter Slegers for source material.