AVDV - AVDV: Best Of Breed Global Small-Cap ETF

Summary

• Avantis International Small Cap Value ETF is an actively managed international small-cap exchange-traded fund.
• AVDV has 59% of its asset value in 3 sectors: industrials, materials and financials, almost in equal weight.
• The heaviest country is Japan, with 27%.
• Since its inception, AVDV has been one of the best, if not the best, in its category.

This ETF review series aims at evaluating products regarding the relative past performance of their strategies and quality metrics of their current portfolios. Holdings and their weights change over time: reviews are updated when necessary.

AVDV strategy and portfolio

The Avantis International Small Cap Value ETF ( AVDV ) was launched on 09/24/2019. As of writing, it has 1281 holdings, a 12-month distribution yield of 2.68% 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. It doesn’t track an index.

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.

Despite its name, AVDV is quite balanced between mid-cap companies (about 55% of asset value) and small caps (about 45%).

I will use the Vanguard FTSE All-World ex-US Small-Cap ETF ( VSS ) as a benchmark. Japan is by far the heaviest country with 27% of asset value, followed by the U.K. (14%), Canada (11%) and Australia (10%). Other countries are below 5%. Compared to VSS, AVDV significantly overweights Japan, the U.K. and Australia. The next chart plots the top 10 countries, representing 84% of assets.

The portfolio has three major sectors: Industrials (21%), financials and materials (19% each). Consumer discretionary and energy are at 11%, then other sectors are below 5%. Compared to VSS, AVDV overweights financials, materials and energy. It underweights real estate, technology, healthcare, and utilities.

As expected for a value exchange-traded fund ("ETF"), AVDV is much cheaper than VSS regarding the usual valuation ratios, listed in the next table.

(Data source: Fidelity.)

The top 10 holdings, listed in the next table, represent 6.12% of asset value. The heaviest one weights 0.78%, so risks related to individual stocks are very low.

Past performance

Since inception, AVDV beats VSS by almost 10 percentage points in total return, and it is on par with the U.S small-cap index iShares Russell 2000 ETF ( IWM ). A 3-year history is too short to assess a strategy, but it is encouraging.

Data calculated with Portfolio123

The next chart compares all global small-cap ETFs with more than $500,000 in asset value, since AVDV inception. AVDV outperforms all of them. The only one coming close is the iShares MSCI Intl Small-Cap Multifactor ETF ( ISCF ).

Takeaway

Avantis International Small Cap Value ETF is an actively managed international small-cap fund focused on value and profitability. It is much cheaper than a global small-cap benchmark regarding valuation metrics. As profitability is part of the strategy, we can expect AVDV to avoid a lot of value traps. Almost 60% of asset value is in 3 sectors: industrials, materials and financials, with about 20% in each of them. No sector weights more than 21%, and no holding weights more than 1%. Japan is the heaviest country with 27%. Price history is short, but promising: since its inception, AVDV has beaten most, if not all, of its competitors in the same category. Moreover, the yield of 2.7% is attractive for dividend-oriented investors who are looking for international diversification.

For transparency, a part of my equity investments is split between a passive ETF allocation (AVDV is not part of it) and my actively managed Stability portfolio (14 stocks), disclosed and updated in Quantitative Risk & Value.

For further details see: