In the past, small cap investors had to trawl through mountains of financial data, unravel sometimes complex financials and analyse industry prospects for tens or hundreds of tiny companies before they found a true hidden gem- a company that returns 10 or even 100 times its original purchase price.
Investors have been searching for a way to automate this process for years. To a certain extent the internet has helped, but the numbers often don't tell the whole story when it comes to small companies.
Help Is Here!
The Motley Fool's Hidden Gems service is great for recommending individual stocks but for those that want an even more hands-off solution there's a new small cap exchange traded fund (ETF) called the MVSMALLCAP ETF UNITS (ASX: MVS). While that name may seem like a bit of a mouthful it actually stands for Market Vectors Small Cap Dividend Payers ETF.
The fund "invests in a diversified portfolio of ASX-listed small companies with the aim of providing investment returns (before management costs) that closely track the returns of the Market Vectors Australia Small-Cap Dividend Payers Index (MVMVSTRG)."
The index is "a pure play rules based Australian sector index that tracks the performance of the most liquid dividend paying small cap local or offshore ASX listed companies which generate at least 50% of their revenues or assets from Australia."
What does that mean?
The fund invests in some of Australia's best small cap stocks that are already profitable and paying dividends to shareholders. Now, this is where things get interesting, because most people define small cap stock as those below around $500 million market capitalisation, while many of the funds' holdings are much larger than that.
The fund's top 10 holdings count for 26% of net assets and are:
- IOOF Holdings Limited (ASX: IFL)
- Magellan Financial Group Ltd (ASX: MFG)
- Perpetual Limited (ASX: PPT)
- Qube Holdings Ltd (ASX: QUB)
- Orora Ltd (ASX: ORA)
- DuluxGroup Limited (ASX: DLX)
- M2 Group Ltd (ASX: MTU)
- Domino's Pizza Enterprises Ltd. (ASX: DMP)
- CSR Limited (ASX: CSR)
- BWP Trust (ASX: BWP)
There's nothing right or wrong about the companies being larger than traditional small caps, but investors need to understand the types of stocks that are held by the ETF.
The great thing about ETFs is that you get exposure to hundreds of companies and you only have to pay one set of brokerage. The ETFs are also extremely low cost to the investor, but don't allow the control (or as many of us say, the enjoyment) in picking individual companies.
