Which ASX ETFs could explode if small caps surge in 2024?

Many pundits are predicting smaller stocks will outperform this year. Here are some funds that could help you join the party.

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Some experts are telling everyone who'll listen that small-cap stocks are going to go gangbusters in 2024.

The reasoning is that they have underperformed compared to their larger cap sisters over the last two years as inflation and rising interest rates forced investors to flee for more conservative options.

But now with the tantalising prospect of rate cuts looming, it could be time for sweet revenge.

"The fundamental setup for small cap returns in 2024 is compelling," the analysts at LSN said in a memo to clients.

"Valuations are attractive, the earnings outlook is robust, and tailwinds from an improved economic backdrop historically provide active small cap managers with outsized returns."

They noted that even Australia's sovereign wealth fund, the Future Fund, has started a new program to buy small-cap ASX shares. 

"ASX small caps have underperformed the ASX top 100 by 25% since August 2021 and are now trading at substantial discount, despite the outlook for significantly more earnings growth," read the LSN memo.

"This has not gone unnoticed in capital markets with a recent flurry of M&A from financial investors and industry players taking advantage of the environment."

How to grab a piece of the small-cap action

So, if you believe in this thesis, how do you take advantage?

Of course, you can buy ASX small caps directly. But that requires much research and due diligence, which is all the more harder with less information available to the public than the big businesses.

One shortcut might be to buy an exchange-traded fund (ETF) that invests in smaller ASX businesses.

As well as cutting down on the required research, such funds have the advantage of providing immediate diversification to potentially smooth out the volatility of individual stocks.

Here are four ETFs on the ASX that invest in small-cap equities:

Exchange-traded fund Fee per

annum
5-year return per annum

(distributions reinvested)
Distribution

yield
Vanguard MSCI Australian Small Companies

Index ETF (ASX: VSO)
0.3%9.89%3%
VanEck Small Companies Masters ETF

(ASX: MVS)
0.49%5.16%4.6%
iShares S&P/ASX Small Ordinaries ETF

(ASX: ISO)
0.55%5.89%2.6%
Betashares Australian Small Companies

Select Fund (ASX: SMLL)
0.39%8.05%3.7%
Source: vendor data

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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