In short: 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.
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.
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