Title: ETF Portfolio Update: February 2026 — Profitable Small Caps Outperform
Show: Compounding Quality (compoundingquality.net — Pieter Slegers' quality-investing newsletter)
Guest: Pieter Slegers (author)
Date: 2026-FEB-19
URL: https://www.compoundingquality.net/p/etf-portfolio-update-february-2026
Length: written post (paid) — no timestamps
Note: Paid-subscriber post captured via Stephen's logged-in session. Body text verbatim; page chrome removed. The SCOW top-holdings table and both ETF-portfolio transaction sheets are published as images and are transcribed below as [Table image — ...] blocks.

Investing has never been easier.
- You buy an ETF
- You are invested in hundreds of companies at the same time

Let's update you on Our ETF Portfolio today.


Multiple roads lead to heaven

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: These 4 factors outperform - Quality, Size, Value & Momentum
Emerging Markets: Emerging Markets tend to do better on the long term

All these different strategies outperform the market over time.

You should pick the strategy and investment style you feel the most comfortable with.


Small = beautiful

Small companies tend to outperform the market in the long term.

Just look at this chart:

[Image — small cap vs large cap long-term returns]

The smallest companies outperformed large caps by 1.8% per year on average.

As compounding works exponentially, this results in a massive outperformance over time.

Just imagine you invested $10,000 twenty years ago:
- Large Caps: $64,870 (9.8% return)
- Small Caps: $89,800 (11.6% return)


Small caps are cheap

Another interesting thing about small caps right now?

Today, they are way cheaper than large caps.

I think the market is in an exaggeration phase for many large caps.

That's why investing in smaller companies could make a lot of sense.
- Mid Caps: 29% cheaper than large caps
- Small Caps: 32% cheaper than large caps

[Image — small/mid vs large cap relative valuation. Source: Tobias Carlisle on X]

I think this valuation gap won't continue to exist:
- 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

The key message?
- Small caps outperform large caps
- Today you can buy them at a wide discount.

This looks like a recipe for beating the market.


Which Small Caps to Buy?

If you want to keep it easy, you could just buy the Russell 2000.

This index tracks the performance of 2,000 small companies in the US.

But there is a problem with this index.

It includes a lot of unprofitable companies.

[Image — share of unprofitable companies in the Russell 2000. Source: Apollo]

I think we can do better.


Cash Flow = King

Income is an opinion. Cash flow is a fact.

In the world of investing, Free Cash Flow (FCF) is the most important metric.

Free Cash Flow is simply the cash a company has left over once all expenses have been paid.

The Simple Formula

To calculate the Free Cash Flow, you only need two numbers:
- Operating Cash Flow: The money the company make from selling its products and/or services
- Capital Expenditures (CapEx): The money the company spends to keep the business running (new factories, laptops, or repairs).

Free Cash Flow = Operating Cash Flow - CapEx

You should only want to invest in small companies that are profitable.

That's why we are looking at small caps with a positive Free Cash Flow.

This is already a great improvement from the Russell 2000.

But I still think we can do better.


Returns on Capital

Companies with strong Free Cash Flow have five strategic options:
- Pay Down Debt: This strengthens the balance sheet
- Reinvest: Invest back in the business to grow faster
- Acquisitions: Buy other great businesses
- Pay Dividends: Give cash directly to you
- Buy Back Shares: Make your shares more valuable

The most attractive option?

Option number 2.

You want companies to reinvest heavily in their own future growth.

Just listen to Charlie Munger:

[Image — Charlie Munger quote card]

So here's the strategy you can use:
- Buy small companies
- That are making money (positive Free Cash Flow)
- And allocate that capital well (high Returns on Capital)

This strategy tends to do really well in the long term.

You could define it as 'Small-High Quality':

[Image — Small-High Quality factor quadrant]

How to play this idea?

Via an ETF like the one below.


ETF of the Month (Spotlight): Pacer S&P SmallCap 600 Quality FCF Aristocrats ETF (SCOW)

Key Information
- Name: Pacer S&P Small Cap 600 Quality FCF Aristocrats ETF
- Ticker: SCOW
- ISIN: US69374H2206
- Total Expense Ratio: 0.59%
- Physical/Synthetic ETF: Physical

Please note that, unfortunately, this ETF is only available for investors in North America.

What?

SCOW invests in these kind of companies:
- High-quality
- Very profitable (generating a lot of cash)
- Reinvesting that cash heavily in organic growth

How it works in practice?
- The ETF looks at 600 small American companies
- It only selects the ones that have been profitable 7 years in a row
- Afterwards, it checks two things:
  - How much cash does the company keep from every dollar it makes?
  - How good is the company at turning money into more cash?
- Finally, the ETF buys the 80 best companies.

[Image — SCOW index methodology. Source: Pacer ETFs]

This gives you a portfolio of companies with:
- Much higher profit margins
- Much better capital allocation skills (high ROIC)

Compared to the average company within the S&P 600 index.

[Image — SCOW vs S&P 600 margins and ROIC. Source: Pacer ETFs]

Why?

This strategy is interesting because companies with these characteristics tend to outperform the market over time:

[Image — high FCF/high ROIC outperformance. Source: Lord Abbett]

Sector Split

Here's the breakdown of the sectors the ETF invests in:

[Image — SCOW sector split. Source: Pacer ETFs]

Information Technology (25.75%) and Financials (23.97%) make up almost half of the portfolio.

Top Holdings

Here are the top 10 holdings of SCOW:

[Table image — SCOW top 10 holdings. Columns: Ticker | Holding | Weight.
JXN | Jackson Financial Inc | 6.29
IDCC | InterDigital Inc | 4.90
MKTX | MarketAxess Holdings Inc | 4.44
ENVA | Enova International Inc | 4.09
ETSY | Etsy Inc | 3.93
ENPH | Enphase Energy Inc | 3.82
MGY | Magnolia Oil & Gas Corp | 3.80
BFH | Bread Financial Holdings Inc | 3.01
BOX | Box Inc | 2.62
NMIH | NMI Holdings Inc | 2.54
Total | 39.44
Source: Pacer ETFs]


Our ETF Portfolio

Our ETF Portfolio is a great mix of ETFs that should be able to outperform in the long term.

We use multiple factors that tend to do well:
Quality: Only invest in companies that have already won
Size: The smaller the better
Multifactor: Quality, size, value & momentum
Emerging Markets: Small exposure to Emerging Markets

Let's now dive into the ETF Portfolio itself.

You have 24/7 access to the ETF Portfolio here: ETF Portfolio

There's one portfolio for Americans.
And one for non-Americans.

Why?
- 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.


American ETF Portfolio

The American ETF Portfolio is invested in these ETFs:

[Image — American ETF Portfolio composition]

The performance looks as follows:

[Image — American ETF Portfolio performance]

The return per transaction looks as follows:

[Table image — American ETF Portfolio, return per transaction. Columns: Date | ETF | Q | Price | Value | Cash | Current stock price | Current Value | Profit/Loss | Profit/Loss (%).
10/13/2023 | Invesco S&P 500 Equal Weight ETF | 3.56 | $140.3 | $499.47 | -$499.47 | $202.26 | $720.05 | $220.58 | 44.16%
11/10/2023 | VanEck Morningstar Wide Moat ETF | 6.80 | $73.5 | $499.80 | -$499.80 | $105.53 | $717.60 | $217.80 | 43.58%
12/15/2023 | Vanguard Small-Cap ETF | 2.35 | $212.8 | $500.01 | -$500.01 | $277.35 | $651.77 | $151.76 | 30.35%
1/19/2024 | Invesco S&P MidCap Quality ETF | 5.59 | $89.4 | $499.75 | -$499.75 | $108.95 | $609.03 | $109.28 | 21.87%
2/9/2024 | WisdomTree Emerging Markets Multifactor Fund | 19.72 | $25.4 | $500.89 | -$500.89 | $34.42 | $678.76 | $177.87 | 35.51%
3/25/2024 | Vanguard Small-Cap ETF | 2.23 | $224.6 | $500.77 | -$500.77 | $277.35 | $618.49 | $117.72 | 23.51%
4/26/2024 | VanEck Morningstar Wide Moat ETF | 5.83 | $85.8 | $500.10 | -$500.10 | $105.53 | $615.24 | $115.14 | 23.02%
5/31/2024 | Invesco S&P 500 Equal Weight ETF | 3.05 | $164.0 | $500.08 | -$500.08 | $202.26 | $616.89 | $116.82 | 23.36%
6/21/2024 | WisdomTree Emerging Markets Multifactor Fund | 18.07 | $27.7 | $500.00 | -$500.00 | $34.42 | $621.97 | $121.97 | 24.39%
7/26/2024 | Invesco S&P MidCap Quality ETF | 5.16 | $96.9 | $499.80 | -$499.80 | $108.95 | $562.18 | $62.38 | 12.48%
10/18/2024 | Vanguard Small-Cap ETF | 2.06 | $242.7 | $500.00 | -$500.00 | $277.35 | $571.34 | $71.34 | 14.27%
11/15/2024 | WisdomTree Emerging Markets Multifactor Fund | 18.62 | $26.9 | $500.13 | -$500.13 | $34.42 | $640.90 | $140.77 | 28.15%
3/7/2025 | Tema Durable Quality ETF | 15.41 | $32.45 | $500.05 | -$500.05 | $36.40 | $560.92 | $60.87 | 12.17%
4/25/2025 | iShares MSCI USA Min Vol Factor ETF | 5.51 | $90.70 | $499.76 | -$499.76 | $96.03 | $529.13 | $29.37 | 5.88%
7/7/2025 | Invesco S&P 500 Equal Weight ETF | 2.71 | $184.75 | $500.00 | -$500.00 | $202.26 | $547.39 | $47.39 | 9.48%
8/8/2025 | Tema Durable Quality ETF | 14.74 | $33.92 | $500.00 | -$500.00 | $36.40 | $536.56 | $36.56 | 7.31%
10/30/2025 | WisdomTree Emerging Markets Multifactor Fund | 15.94 | $31.4 | $500.00 | -$500.00 | $34.42 | $548.61 | $48.61 | 9.72%
2/8/2026 | Final value: $10,346.84 | CAGR 14.1% | Current value Portfolio $10,346.84]


Non-American ETF Portfolio

The Non-American ETF Portfolio is currently invested in these ETFs:

[Image — Non-American ETF Portfolio composition]

The performance looks like this:

[Image — Non-American ETF Portfolio performance]

The return per transaction looks as follows:

[Table image — Non-American ETF Portfolio, return per transaction. Columns: Date | ETF | Q | Price | Value | Cash | Current stock price | Current Value | Profit/Loss | Profit/Loss (%).
10/13/2023 | iShares S&P 500 Equal Weight | 101.00 | EUR4.95 | EUR499.95 | -EUR499.95 | EUR7.27 | $734.27 | $234.32 | 46.87%
11/10/2023 | iShares MSCI World Small Cap | 89.00 | EUR5.62 | EUR500.18 | -EUR500.18 | EUR8.23 | $732.83 | $232.65 | 46.51%
12/15/2023 | VanEck Morningstar Global Wide Moat | 21.20 | EUR23.58 | EUR499.90 | -EUR499.90 | EUR32.67 | $692.69 | $192.79 | 38.57%
1/19/2024 | iShares Edge MSCI World Multifactor | 55.13 | EUR9.07 | EUR500.03 | -EUR500.03 | EUR14.36 | $791.67 | $291.64 | 58.32%
2/9/2024 | iShares Core MSCI Emerging Markets | 17.23 | EUR29.02 | EUR500.01 | -EUR500.01 | EUR41.46 | $714.36 | $214.34 | 42.87%
3/25/2024 | VanEck Morningstar Global Wide Moat | 19.80 | EUR25.25 | EUR499.95 | -EUR499.95 | EUR32.67 | $646.94 | $146.99 | 29.40%
4/26/2024 | iShares MSCI World Small Cap | 78.48 | EUR6.37 | EUR500.00 | -EUR500.00 | EUR8.23 | $646.20 | $146.21 | 29.24%
5/31/2024 | iShares S&P 500 Equal Weight | 87.00 | EUR5.76 | EUR501.12 | -EUR501.12 | EUR7.27 | $632.49 | $131.37 | 26.22%
6/21/2024 | iShares Core MSCI Emerging Markets | 15.53 | EUR32.20 | EUR500.07 | -EUR500.07 | EUR41.46 | $643.87 | $143.81 | 28.76%
7/26/2024 | iShares Edge MSCI World Multifactor | 46.73 | EUR10.70 | EUR500.01 | -EUR500.01 | EUR14.36 | $671.04 | $171.03 | 34.21%
10/18/2024 | iShares MSCI World Small Cap | 73.00 | EUR6.85 | EUR500.05 | -EUR500.05 | EUR8.23 | $601.08 | $101.03 | 20.20%
11/14/2024 | iShares Edge MSCI World Multifactor | 43.86 | EUR11.40 | EUR500.00 | -EUR500.00 | EUR14.36 | $629.83 | $129.83 | 25.96%
3/7/2025 | VanEck Morningstar Global Wide Moat | 16.95 | EUR29.50 | EUR500.03 | -EUR500.03 | EUR32.67 | $553.82 | $53.80 | 10.76%
4/25/2025 | iShares Edge MSCI World Minimum Volatility UCITS ETF | 8.00 | EUR62.63 | EUR501.04 | -EUR501.04 | EUR75.10 | $600.80 | $99.76 | 19.91%
7/7/2025 | iShares S&P 500 Equal Weight | 75.64 | EUR6.61 | EUR500.00 | -EUR500.00 | EUR7.27 | $549.92 | $49.92 | 9.98%
8/8/2025 | iShares Edge MSCI World Minimum Volatility UCITS ETF | 8.02 | EUR62.32 | EUR500.00 | -EUR500.00 | EUR75.10 | $602.54 | $102.54 | 20.51%
10/30/2025 | iShares Core MSCI Emerging Markets | 12.84 | EUR38.94 | EUR500.00 | -EUR500.00 | EUR41.46 | $532.36 | $32.36 | 6.47%
2/8/2026 | Final value: $10,976.71 | CAGR 18.5% | Current value Portfolio $10,976.71]

Our Non-American ETF Portfolio is currently slightly outperforming the American one:

[Image — American vs Non-American ETF Portfolio comparison]

Over time, I expect both portfolios to generate similar returns.


New transaction

Tomorrow at the opening, we will add to our ETF Portfolio.

We will buy some extra small caps.

For Americans:
- Buy Vanguard Small Cap ETF ($VB) for $500
- Current stock price: $278
- Read more about this ETF here

For Non-Americans:
- Buy iShares MSCI World Small Cap ETF ($IUSN) for EUR500
- Current stock price: EUR8.36
- Read more about this ETF here

Everything In Life Compounds
Team Compounding Quality

Book
Order your copy of The Art of Quality Investing here

Used sources
Interactive Brokers: Portfolio data and executing all transactions
Fiscal.ai: Financial data

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