A perfectly adequate strategy for some investors is just to invest in a simple exchange-traded fund (ETF) such as Vanguard Australian Share ETF (ASX: VAS).
But by doing that you would miss out on investing in ASX small caps. I think there are plenty of reasons why I think you should consider investing in small caps:
Many of the largest businesses on the ASX such as Commonwealth Bank of Australia (ASX: CBA), Telstra Corporation Ltd (ASX: TLS) and Woolworths Group Ltd (ASX: WOW) have reached a very mature stage of their growth. Their revenue isn’t going to grow very fast for the foreseeable future.
However, smaller businesses have the potential to create much more growth as they deliver on their potential in Australia and other countries.
Most of the underlying earnings of the big ASX businesses are generated from Australia (and New Zealand). That is very country-specific earnings.
Meanwhile, you can find smaller Australian (or Kiwi) businesses that generate a much larger portion of their earnings overseas such as Pushpay Holdings Ltd (ASX: PPH) and Volpara Health Technologies Ltd (ASX: VHT).
Potentially lower valuations
These small businesses may also be trading at a lower multiple of their earnings due to the fact that they are not followed by many investors, despite the potentially better growth prospects.
However, there are some large businesses that are just so excellent and have a strong economic moat that they could continue to be winners for years to come and are worth the premium. There aren’t many examples of these on the ASX, but CSL Limited (ASX: CSL) and REA Group Limited (ASX: REA) are two that come to mind.
The key problem is identifying which ASX small caps are worth buying, which is why I’m happy to leave the selection to fund managers I respect such as WAM Microcap Limited (ASX: WMI) and Naos Emerging Opportunities Company Ltd (ASX: NCC). However, there are plenty of opportunities out there.
However, some smaller ASX growth businesses that could be worth a spot in your portfolio are these exciting winners.
Our Motley Fool experts have just released a brand new FREE report, detailing 5 dirt cheap shares that you can buy today.
Stock #1 is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…
Stock #2 is another high-growth business trading near a 52-week low all while offering a 4.7% grossed-up yield...
Plus 3 more cheap bets that could position you to profit over the next 12 months!
See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.
Tristan Harrison owns shares of InvoCare Limited, Propel Funeral Partners Ltd, and WAM MICRO FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of and has recommended PUSHPAY FPO NZX, Telstra Limited, and VOLPARA FPO NZ. The Motley Fool Australia has recommended InvoCare Limited, Propel Funeral Partners Ltd, REA Group Limited, and ResMed Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.