When evaluating ETF momentum, investors often turn to various data points, from technical charts to performance returns. However, one of the clearest indicators of market sentiment can be fund flows. If interpreted correctly, flows reveal what areas of the market are capturing attention. Currently, it appears that small caps are in focus, with the small-cap value ETF AVUV reaching $3 billion in year-to-date flows, according to ETF Database.
The Avantis U.S. Small Cap Value ETF (AVUV) recently surpassed $10 billion in assets under management and has now climbed to $13.1 billion, driven by significant inflows this year. In the past month alone, AVUV attracted $673 million in net inflows, with the three-month total rising to $1.2 billion.
What is fueling this surge of interest in the small-cap value ETF? AVUV employs an active strategy in its small-cap value mandate, aiming for long-term capital appreciation by targeting highly profitable small-cap value stocks. The fund screens for fundamental factors such as cash flow, price-to-book ratio, and shares outstanding, while charging an expense ratio of 25 basis points.
According to data from Avantis Investors, AVUV has delivered a 17.6% return over the past year on an average annual basis, outperforming its benchmark, which returned 10.9% during the same period.
The rapid inflow pace may be influenced by the growing expectation that the Federal Reserve will cut interest rates this fall. Rate cuts would likely favor smaller companies more than larger ones due to the higher debt levels typically carried by smaller firms. Additionally, with many larger firms currently overvalued and overconcentrated, the potential upside from rate cuts may be more pronounced among smaller, undervalued stocks.
This is where a small-cap value ETF like AVUV can be appealing. For investors considering ETF options for the second half of the year, this strategy might be worth exploring.
