VSS - AVDV: A Well-Diversified Global ETF Beating Its Peers

2023-07-24 08:12:54 ET

Summary

• Avantis International Small Cap Value ETF is an actively managed ETF focused on value and profitability.
• Japan represents 28% of asset value.
• The portfolio is well-diversiifed across sectors and holdings.
• AVDV has beaten most, if not all its competitors since its inception.

This article series aims at evaluating ETFs (exchange-traded funds) regarding past performance and portfolio metrics. Reviews with updated data are posted when necessary.

AVDV strategy and portfolio

Avantis International Small Cap Value ETF ( AVDV ) was launched on 09/24/2019. As of writing, it has a portfolio of 1335 stocks, a 12-month distribution yield of 3.20% and a total expense ratio of 0.36%. Distributions are paid semi-annually. AVDV is an actively managed fund investing in small caps with value and profitability characteristics. The strategy is also available as a mutual fund ( AVDVX ).

As described in the prospectus by Avantis Investors ,

The portfolio managers define “value characteristics” mainly as adjusted book/price ratio (though other price to fundamental ratios may be considered). The portfolio managers define “profitability” mainly as adjusted cash from operations to book value ratio (though other ratios may be considered). The portfolio managers may also consider other factors when selecting a security, including industry classification, the past performance of the security relative to other securities, its liquidity, its float, and tax, governance or cost considerations.

Such a description offers a lot of flexibility to the fund's managers. On the downside, the strategy is not as transparent as for an index-based ETF. About 64% of asset value is in small and micro cap companies, and 36% is in mid-caps. The portfolio turnover was 21% in the most recent fiscal year. In this article, I will use Vanguard FTSE All-World ex-US Small Capital Index Fund ( VSS ) as a benchmark.

Japan is the heaviest country in the portfolio with 28% of asset value, followed by the U.K. (13%), Canada (10%) and Australia (9%). Other countries don’t exceed 5%. Compared to VSS, AVDV significantly overweights Japan, Australia, European countries, and underweights Canada. The next chart plots the top 10 countries, representing 84% of assets.

The portfolio has three major sectors: Industrials (22%), financials (19%) and materials (17%). Consumer discretionary and energy are between 11% and 12%. Other sectors are below 5%. Compared to VSS, AVDV massively overweights financials, materials and energy. It underweights mostly technology, real estate, healthcare and utilities.

As expected, AVDV is much cheaper than VSS regarding the usual valuation ratios, as reported in the next table.

(data: Fidelity)

The top 10 holdings, listed below, represent 6.9% of asset value. The heaviest one weights 0.86%, so risks related to individual companies are very low.

Past performance

Since inception, AVDV beats the ex-U.S. small cap benchmark ( VSS ), and is on par with the U.S small cap index Russell 2000 ( IWM ). Price history is too short to assess the strategy, but it is encouraging.

The next chart compares AVDV since inception with other global small cap ETFs: it has outperformed all of them.

Takeaway

Avantis International Small Cap Value ETF holds a global portfolio of over 1300 stocks with value and profitability characteristics. It is much cheaper than a global small cap benchmark regarding valuation metrics. Moreover, profitability screening helps avoid a number of value traps. Japan is the heaviest country with a weight of 28%. Almost 60% of asset value is in 3 sectors: industrials, materials and financials. The portfolio is well-diversified across sectors (none weighs more than 22%) and holdings (none weighs more than 0.9%). Price history is short, but promising: AVDV has beaten most, if not all its competitors since inception. On top of that, the distribution yield is attractive for dividend-oriented investors who are looking for international diversification. The main downside of this fund is the lack of transparency of its strategy, like for all actively managed funds.

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