5 Best Performing Small-cap ETFs in 2023

4. Motley Fool Small-Cap Growth ETF (TMFS)

Year-to-Date Returns: 17.7%

The Motley Fool Small-Cap Growth ETF (TMFS) provides exposure to small-cap companies that the fund believes are underappreciated, with an emphasis on their long-term growth trajectories. The fund holds just 31 high conviction stock picks, which it scans for through its proprietary 4-point Quality framework. The ETF has an expense ratio of 0.85%.

The ETF’s top holding at 5.40% weighting is home and business security company Alarm.com Holdings, Inc. (NASDAQ:ALRM). The company grew revenue by 13.3% year-over-year in Q2 excluding the impact from Vivint (more on that below), along with $36.4 million in adjusted EBITDA. The company released the first battery-free video doorbell during the second quarter, which it anticipates strong demand for, particularly in the north and southwest given its wide operating temperature range.

Alarm.com Holdings, Inc. (NASDAQ:ALRM) is currently embroiled in a lawsuit with former customer Vivint, which it says is violating 15 of its patents now that the company is no longer paying licensing revenue to Alarm.com. Vivint has stated that it is no longer required to pay licensing revenue to Alarm.com given the Patent Cross License Agreement between the two companies. However, that agreement was executed back in 2013, with Vivint paying licensing fees ever since, until late last year.

Polen Capital was sticking with Alarm.com Holdings, Inc. (NASDAQ:ALRM) despite some of its recent headwinds, as revealed in its Q4 2022 investor letter:

“Alarm.com Holdings, Inc. (NASDAQ:ALRM), a cloud-based provider of remote control, home automation, and security monitoring services, shares were down on a weaker-than-expected initial outlook for FY23. Additionally, the company is going into arbitration with customer Vivint, which has stopped paying them licensing revenue, which is a roughly 3% headwind to the top line. While we continue to monitor these developments closely, this is a very stable business that has historically been able to grow through more challenging macro backdrops, given the stickiness of its core SaaS revenue.”