Australian ASX small-cap shares are often considered to have better growth prospects than their blue-chip peers, and there are many small companies paying a hefty dividend yield. Can the BetaShares Australian Small Companies Select Fund (ASX: SMLL) provide the best of both worlds?
About ETFs
ETFs are investment funds that are listed on a securities exchange. They can be ‘managed funds’ or ‘index funds’, or in other words, active or passive.
Typically, ETFs give an investor exposure to many different shares or assets with a single purchase, offering one of the quickest and easiest methods of achieving diversification. The Best ETFs website has a list of Australian ETFs.
About The Fund
The BetaShares Small Companies Select Fund (ASX SMLL) is an ASX-listed managed fund that aims to outperform the S&P/ASX Small Ordinaries Accumulation Index and provide investors with regular capital growth and income.
The fund provides diversification through a portfolio of 50-100 companies that are typically between the 101-350 largest on the ASX by market cap.
This means investors are not being overexposed to the largest 100 companies that they may already hold through other ETFs or superannuation.
The companies are screened to identify businesses with positive earnings and a strong ability to service debt.
The largest sector allocation is materials (25.5%), followed by consumer discretionary (18.7%) and industrials (14.1%).
Some familiar companies in the portfolio include Ansell Ltd (ASX: ANN) and Iluka Resources Ltd (ASX: ILU).
Performance
Since inception in April 2017, the SMLL fund has underperformed the index it aims to beat, returning 8.88% per year compared to the index return of 10.76% per year.
The dividends from the SMLL ETF are worth considering with the 12-month distribution yield on 30th June 2019 at 4.9%. Distributions are semi-annual and there are options available for a dividend reinvestment plan (DRP).
SMLL Fees And Risks
The management costs for the Small Companies Select Fund are 0.39% per year, which seems low for an actively-managed fund. However, if the fund outperforms the index then there is an additional fee of 15.5% of the outperformance.
This adds up and most investors would probably be better off in a fund with low or no performance fees.
While the fund has not outperformed the index since inception, it has slightly outperformed in the last 12 months (2.92% compared to 1.92%).
Besides the fees, investing in smaller companies tends to come with increased volatility and sometimes weaker balance sheets. Hopefully, the SMLL ETF’s screening methods can eliminate the weaker performers.
Summary
The return over the last 12 months has been very low, despite a double-digit return in the last six months. This goes to show just how volatile the ETF can be, and with a short track record and high-performance fees, I think there are better options around.
I’d rather invest in our number one ETF pick below.
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Diversification: At the time of writing, Max does not own shares in any of the companies mentioned.