Luke Sheather
5 minutes reading time
- Australian shares
After years of lagging the broader market, the sector staged a strong rebound during 2025. But not all small-cap exposure is equal – the universe includes companies with limited earnings, high debt or reliance on a single project or commodity. For investors, the way you access the sector could make a significant difference to your final returns.
The problem with owning the whole index
The S&P/ASX Small Ordinaries index includes hundreds of companies. However, a meaningful portion of those have no earnings, carry significant debt or are entirely dependent on a single project or commodity price. If you were to invest in this part of the market through a broad small cap ETF, you would own all of them.
Historically, these names have driven the worst of the drawdowns in the asset class. In the current environment, where rate sensitivity, heightened cost inflation and refinancing risk remain live concerns for leveraged or unprofitable businesses, that distinction matters more than usual.
Introducing SMLL
SMLL Australian Small Companies Select ETF tracks an index of Australian small cap companies that have been screened for quality, focusing on stronger earnings, healthier balance sheets and reasonable valuations. That means less exposure to speculative or unprofitable names that can weigh on returns during tougher markets. Over the past five years, SMLL has outperformed its benchmark (the S&P/ASX Small Cap Index) by 2.60% p.a.1
Quality small caps are back in vogue
After a prolonged period of large cap dominance, Australian small companies regained meaningful momentum through 2025. But as small caps have pulled back in early 2026 – following the RBA’s return to a tightening stance – some of those gains have come off. For investors in quality-oriented strategies, however, that’s not necessarily a cause for alarm.
Looking back over 25 calendar years (2001–2025), SMLL’s index recorded a smaller annual maximum drawdown than the S&P/ASX Small Ordinaries benchmark in 19 of those years. While not a guarantee of future outcomes, it speaks to how quality screens have historically held up when markets get difficult.
Performance of SMLL vs S&P/ASX 200 and S&P/ASX Small Ordinaries since its 2017 inception
Source: Bloomberg. As at 27 February 2026. Past performance is not an indicator of future performance. You cannot invest directly in an index. SMLL’s inception date is 7 April 2017.
Company spotlight: Nick Scali (ASX: NCK)
SMLL’s index typically draws from a universe of over 400 small cap companies, but at any given time only 50 to 100 pass its quality screens. Nick Scali is one of them.
Most Australians know Nick Scali as a furniture retailer. What’s less visible is the financial discipline that sits behind the brand. In its most recent half year result, the company grew group revenue 7.2% to $269.3 million, lifted gross margins to 65.4% and increased statutory net profit after tax (NPAT) by more than 36% on the prior year. The Australia and New Zealand business performed particularly well, with statutory NPAT for this business rising by more than 29%2.
Nick Scali won’t grab headlines the way a gold miner or a tech stock might. But a profitable, cash-generative retailer with expanding margins and a growing international footprint is precisely the kind of business SMLL’s quality screens are built to surface.
Why consider investing in small caps through SMLL
- Screens out speculative and fundamentally weaker companies: The small cap universe contains many companies with no earnings or high debt. SMLL’s methodology is designed to identify companies with positive earnings and a strong ability to service debt
- Targets the quality characteristics of earnings strength, balance sheet health and valuation: SMLL applies screens seeking companies with more sustainable financials, aiming to reduce exposure to names that carry hidden risk.
- With around $300 million in funds under management3, SMLL is a well-established ETF with significant market participation.
- Listed on the ASX, SMLL can be bought and sold like any share – with no lock-up periods or minimum investment requirements.4
Where SMLL fits in your portfolio
For investors who already hold a core Australian shares position, SMLL can act as a considered complement.
Large cap strategies tend to be concentrated in the biggest banks and miners, while small caps offer exposure to a different part of the economy – businesses and companies at an earlier stage of growth. Adding a quality-screened small cap allocation through SMLL may help broaden diversification while reducing the speculative risk that often comes with the segment.
For more information on SMLL, see Betashares Direct or its fund page.
Disclaimer
There are risks associated with an investment in SMLL, including investment objective risk, market risk and small companies risk. Investment value can go up and down. An investment in the Fund should only be considered as a part of a broader portfolio, taking into account your particular circumstances, including your tolerance for risk. For more information on risks and other features of the Fund, please see the Product Disclosure Statement and Target Market Determination, both available on www.betashares.com.au/direct.
Sources:
1. As at 27 February 2026. Past performance is not indicative of future returns. ↑
2. https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-03056076-2A1653406&v=undefined ↑
3. As at 6 March 2026. ↑
4. Whilst not mandatory, the recommended holding period for SMLL is 5 years or more. Please see the PDS and TMD for more information about the Fund. ↑