Motley Fool Asset Management has unveiled its second ETF, the Motley Fool Small-Cap Growth ETF (MFMS US), on Cboe BZX.
Charly Travers, portfolio manager at Motley Fool Asset Management.
The financial services media company has turned to active management for its second launch, targeting US-listed small-caps with strong quality and growth characteristics.
Portfolio manager Charly Travers conducts bottoms-up, business-focused research to select at least 30 of Motley Fool’s best small-cap ideas with long-term growth potential.
According to the fund’s prospectus, Motley Fool defines small-cap stocks as those with market capitalizations in the same range as those stocks that make up the Russell 2000 Growth Index.
In identifying investments for the fund, Travers looks for securities of companies that have high-quality businesses with strong market positions, manageable leverage, and robust streams of free cash flow.
To identify high-quality businesses, Travers focuses primarily on four criteria: (i) management, culture, and incentives; (ii) the economics of the business; (iii) competitive advantage; and (iv) the durability of its competitive advantage period.
Analysis of management, culture and incentives may include manager and board of director fit, the clarity of vision and strategies, culture and turnover, ownership in the business, the sensibility of incentives, capital allocation choices and results, external transparency and candour, and overall treatment of stakeholders.
Analysis of the economics of the business may include looking at the company’s long-term return on capital, the scalability of its business model, relative and absolute margins, business and product cyclicality, and other key performance indicators to gain insight into its potential for future performance.
Investigating the firm’s competitive advantage may include looking at pricing power, geographic barriers to entry, network effects, regulatory barriers to entry and superior brands, among others.
And testing the durability of the firm’s competitive advantage may involve exploring favourable product cycles, customer preference, temporary or tactical advantages or other reasons.
The prospectus notes the ETF will not impose sector constraint limits and may at some points be relatively undiversified; however, a cap of 25% per industry will be applied to prevent severe concentration risk.
It comes with an expense ratio of 0.85%.
The fund is the first actively managed ETF to tap exclusively into the small-cap US equity market and will compete against passive alternatives including the $9.2 billion iShares Russell 2000 Growth ETF (IWO US) costing just 0.25%, less than a third of the price.
Motley Fool introduced its first ETF earlier this year, the Motley Fool 100 ETF (TMFC US), tracking an in-house index that reflects the performance of the 100 largest US companies in The Motley Fool recommendation universe.
To be eligible for inclusion in the index, a stock must have an open “buy” recommendation by Motley Fool research publications or be among the top 150 stocks in The Motley Fool’s “Fool IQ” research database. TMFC costs 0.50% and has accumulated over $140 million in AUM.