Charly Travers

Portfolio Manager

MFAM Small Cap Growth ETF: Fourth Quarter 2018

Performance:

Performance as of 12/31/2018

Since Inception (Annualized)

Inception Date: 10/29/18

Motley Fool Small-Cap Growth ETF NAV (MFMS)

-5.87%

Motley Fool Small-Cap Growth ETF Market Price (MFMS)

-5.95%

Russell 2000 Growth Index

-7.50%

 

Gross Expense Ratio 0.85%. The performance data quoted represents past performance and does not guarantee future results. Current performance may be lower or higher. The investment return and principal of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance as of the most recent month end, please call 1-800-617-0004. Short term performance, in particular, is not a good indication of a fund’s future performance, and investments should not be made based solely on returns.

Commentary:

The Motley Fool Small Cap Growth ETF launched during the worst quarter for domestic small-cap stocks since Q3 2011. Small-cap stocks, as measured by the Russell 2000 Index,* fell 20.5% during the quarter. That sounds bad, but let’s not panic. Before that fall, the market was coming off a strong three-year run during which prices seemed to only go up. As of the end of the year, the Russell 2000 was back to where it was in the fall of 2017.

With the profit growth that’s occurred over that period, we find that small caps are more attractively priced than they’ve been in years.

As for our results, the ETF launched four weeks into the quarter, missing the beginning stages of the market’s fall. From inception on Oct. 29 through the end of the year, the ETF declined 5.87%, compared with a drop of 7.50% for its benchmark, the Russell 2000 Growth Index.*

Curiously, we saw a disconnect between business performance and falling share prices during the quarter. The final tally for the Q3 earnings season was that 74% of companies in the ETF beat earnings estimates. The message coming from the management teams of these companies was that business is good. A lot of our tech and healthcare companies were even raising full-year guidance. Still, stock prices fell.

It’s important to keep in mind that the companies we own are primarily exposed to the U.S. economy. We don’t have a lot of direct exposure to international markets, and that includes China, which is dominating financial headlines these days.

While we’re entering 2019 in a bear market for small caps, we’re still optimistic about the year to come. As I write, the Bureau of Labor Statistics reported much stronger jobs growth than was expected for December. We take that data as confirming what our companies were telling us about the strength of the U.S. economy.

The ETF closed the year with 61% of assets in healthcare and tech companies. This makes sense given our investing style. We want to find the great growth companies of the next decade, and we believe that disproportionately those companies will be in healthcare and tech.

Consider Teladoc Health, which, as the leader in virtual healthcare, has one foot in each sector. A sick person can set up a video call with a medical professional within minutes and, if needed, have a prescription sent to a pharmacy. Not only is this amazingly convenient, but it also costs less than visiting a family doctor or the emergency room. That’s a powerful combination, in our opinion.

We don’t know what the year ahead will bring, but we can promise you that we’ll stick to our investment process that identifies high-quality growth companies and that we’ll focus the ETF in our best ideas.

You can see the full list of holdings in the ETF, updated daily at http://holdings.filepoint.com/api/MotleyFool/MFMS/pdf .

DISCLOSURES

*Holdings are subject to change. Holdings and percent of assets are based on security assets only, not including cash or receiveables (unpaid interest and dividends).

Please consider the charges, risks, expenses, and investment objectives carefully before you invest. Please see the prospectuses for the Motley Fool 100 Index ETF (the “Fund”) containing this and other information. Read it carefully before you invest or send money.

The investment advisor for the Fund is Motley Fool Asset Management, LLC (“MFAM”). Shares of the Fund are distributed by Quasar Distributors, LLC, a registered broker-dealer not affiliated with The Motley Fool or Foreside Fund Distributors, LLC.

The net asset value (“NAV”) of the Fund’s shares is determined as of the close of regular trading on the NYSE (generally 4:00 p.m. Eastern time) each day the NYSE is open. Share are purchased and sold in secondary market transactions at negotiated market prices rather than at NAV. Shares of the Fund may be bought and sold throughout the day on the exchange through a brokerage account. However, shares are not individually redeemable, and may only be redeemed directly from the Fund by Authorized Participants in very large creation/redemption units. Shares may trade at, above or below NAV. Brokerage commissions will reduce returns.

Investing involves risk, including possible loss of principal. To the extent the Fund invests more heavily in particular sectors of the economy (e.g., technology), its performance will be especially sensitive to developments that significantly affect those sectors. Similarly, the Fund is non-diversified, which means that it may invest a high percentage of its assets in a limited number of securities and, as a result, gains or losses on a single stock may have a greater impact on the Fund.

In addition to normal risks associated with investing in equity securities, investments in the Fund are subject to those risks specific to ETFs. Unlike other funds managed by MFAM, the Fund is not actively managed and we do not attempt to take defensive positions in any market conditions, including adverse markets. Likewise, we would not sell shares due to current or projected underperformance of a security, industry, or sector, unless that security is removed from the Index or the selling of shares of that security is otherwise required upon a reconstitution of the Index. As with all index funds, the performance of the Fund and its Index may differ from each other for a variety of reasons, including the operating expenses and portfolio transaction costs not incurred by the Index. In addition, the Fund may not be fully invested in the securities of the Index at all times, or may hold securities not included in the Index. Finally, Fund shares may trade at a material discount to NAV, and this risk is heightened in times of market volatility or periods of steep market declines.

For these and other reasons, there is no guarantee the Fund will achieve its stated objective.

MFAM is a wholly owned subsidiary of The Motley Fool Holdings, Inc., which is a multimedia financial-services holding company. MFAM is a separate entity, and all investment decisions are made independently by the asset managers at MFAM. Neither of TMF co-founders, Tom Gardner and David Gardner, nor any other TMF analyst is involved in the investment decision-making or daily operations of MFAM.

Recent Articles

Any discussion of individual companies on this page is not intended as a recommendation to buy, hold or sell securities issued by those companies. The holdings of MFAM Funds may change at any time and are subject to risk. Current and future portfolio holdings are subject to risk.