Media company The Motley Fool is widening out its presence in the US ETF market, listing its second ETF. The Motley Fool Small-Cap Growth ETF (MFMS) will be actively managed and use quality and growth style criteria to pick US small cap stocks.

In picking small caps, The Motley Fool looks for "high-quality businesses with strong market positions, manageable leverage, robust streams of free cash flow," the prospectus says. To identify high-quality businesses, the Fool will evaluate companies:

  1. management, culture, and incentives;
  2. the economics of the business;
  3. competitive advantage; and
  4. the durability of its competitive advantage period.
The fund will also be non-diversified, meaning it can invest a significant portion of its assets in the securities of a single issuer. But the fund will try and hold more than 30 companies at all times. The non-diversification means that the fund can also have heavy sector tilts.

Analysis - A fool and his money

One of privileges of being a critic in any industry is it's risk-free. Movie critics at the cinema; food critics at restaurants; ETF Stream in its listing reviews -- criticism costs nothing. It's easy to find fault in other peoples' work; while creating things is hard. And at the end of the day, critics firing off a couple paragraphs of judgment and sarcasm have no money riding on the outcome. (See this scene from Birdman).

With this in mind, it is great to see The Motley Fool put their money where their mouth is and list an ETF. While we think there is a bit of a conflict of interest at play on TMF's business model (how can they give objective coverage of their own ETFs?) it's good to see TMF go market side and try their hand at running a product, rather than just penning documents analysing others'.

As for performance, well, the statistics show it is unlikely that this fund will beat IJR (BlackRock's passive small cap tracker). But someone has to outperform the index, and maybe that will be this fund. Who knows?

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