AVEM - AVEM: An EM Fund Investing In Lucrative Segments Of High-Growth Markets

2023-07-31 19:12:10 ET

Summary

• Avantis® Emerging Markets Equity ETF strategically invests in China, Taiwan, India and South Korea; with strategic allocation in specific high-growth sectors of each of these markets.
• As the U.S. has a steep hike in inflation rate as compared to these Emerging Markets, this is leading to an exchange rate that is favoring investments in them.
• Due to their strong financial sectors, emphasis on technology, and willingness to adopt AI, these EMs may fast become a safe haven for global investors.
• AVEM has failed to generate decent yield and acceptable price growth over the years. The only good news is the fund’s 12.26 percent price hike during 2023.

~ by Snehasish Chaudhuri, MBA (Finance).

Avantis® Emerging Markets Equity ETF ( AVEM ) is an exchange-traded fund, or ETF, that invests in value stocks of emerging markets ("EMs"), especially that of Taiwan, China, India and South Korea. It invests in large-cap stocks from diversified sectors. However, only three sectors (information & communication technology, financial, industrial) constitute almost three-fifths of the portfolio. AVEM has a huge assets under management, or AUM, of $3 billion, an expense ratio of 0.33 percent, and turnover ratio of 28 percent. It pays semiannual dividends with a low yield.

Except for the past 12 months, price growth, too, has not been impressive. Its average P/E is quite low at 8.65, and AVEM is trading at a marginal discount of 0.29 percent from its NAV.

AVEM Offers Semiannual Yield, And Generates Both Low Yield And Equally Poor Price Growth

Avantis Emerging Markets Equity ETF was launched in September 2019 by American Century Investment Management Inc. The fund has paid 7 semiannual dividends since then. In general, semiannual dividend-paying funds fail to fulfill the ambition of pension investors. AVEM is not an exception. Moreover, annual average yield so far has been around 2 percent. A 17.24 percent price growth over almost four years is not impressive, either.

However, the good news is that this ETF has grown by 12.26 percent during this year alone. That shows how poorly AVEM performed prior to 2023. It has strategically invested three-fourth of its assets in high growth emerging markets of China, Taiwan, India, and South Korea; with strategic allocations in specific high-growth sectors of each of these markets.

AVEM Has Bought Semiconductor, Technology, And Hardware Stocks From Taiwan & South Korea

We know what are the best-performing sectors from these four economies, and Avantis Emerging Markets Equity ETF made no mistakes in selecting stocks from those particular industries in those particular markets. The list includes Taiwanese & South Korean semiconductor & chip developers - Taiwan Semiconductor Manufacturing Co. Ltd. ( TSM ), SK Hynix Inc., United Microelectronics Corporation ( UMC ); and also companies engaged in the business of developing technology hardware & Storage devices from these two markets - Quanta Computer Inc. ( QUCCF ), Gigabyte Technology Co., Ltd., Samsung Electronics Co., Ltd. ( SSNLF ) and Hon Hai Precision Industry Co., Ltd. ( HNHAF ). Hyundai Motor Company ( HYMTF ), Kia Motors Corp.( KIMTF ), Larsen & Toubro Ltd. ( LTOUF ), and Reliance Industries Limited. These are a few stocks belonging to industrial and conglomerate houses from India and South Korea.

AVEM Opted For IT, e-Commerce, Communication, And Financial Stocks From India & China

Indian IT consulting services companies - Infosys Limited ( INFY ) and Tata Consultancy Services Limited; and Chinese e-commerce and communication services firms - Alibaba Group Holding Limited ( BABA ), Tencent Holdings Limited ( TCEHY ), NetEase, Inc. ( NTES ), and Vipshop Holdings Limited ( VIPS ) are also among the major investments of Avantis Emerging Markets Equity ETF. Indian and Chinese financial giants are not left-out, too. ICICI Bank Limited ( IBN ), China Construction Bank Corporation ( CICHY ), HDFC Bank Limited ( HDB ), Industrial and Commercial Bank of China Limited ( IDCBY ), Ping An Insurance (Group) Company of China, Ltd. ( PNGAY ), Bank of China Limited ( BACHY ) and China Merchants Bank Co., Ltd. ( CIHKY ) are also an integral part of its portfolio. These 24 stocks are among the top 30 investments of AVEM.

Why Invest In Emerging Markets Of Taiwan, China, India, And South Korea?

Avantis Emerging Markets Equity ETF investment seeks long-term capital appreciation. Emerging markets have the potential of delivering such growth in the long term as the economic downturn persists in the United States. These economies may also make significant gains due to their emphasis on technology and willingness to adopt artificial intelligence (("AI")) at a fast pace.

In India, domestic demands are continuously moving in the upward direction as the pandemic’s impact wears off, with the past few quarters bringing positive surprises in key sectors. The Russian invasion of Ukraine has had a minimal impact on India’s economy, rather had a positive impact in some sectors. While the stronger dollar and rising global rates hit tech-heavy markets like South Korea and Taiwan, India did not face any such problem. Rather, India is witnessing a return of foreign investors as well as an unprecedented boom in retail investing. This has provided further momentum in India’s growth story.

Taiwan’s tech-based export dominance is expected to continue. The growth potential of South Korean and Taiwanese economies is also due to their chip dominance, as the markets are home to industry heavyweights like TSM, ASE Technology, UMC, MediaTek, QUCCF, Nanya Technology, SSNLF, AU Optronics, HNHAF, etc. These two markets also do huge trades with China. China has removed all types of covid restrictions, and is providing policy support for its troubled real estate sector. Growth of the Chinese economy will again boost up the emerging markets not only in North Asia, but also in South-East Asia.

Risks Associated With Investing In EMs Of Taiwan, China, India, & South Korea

However, with their heavy export dependence, all these markets except India are vulnerable to the risk of a global recession and are often at the center of geopolitical tensions that involve the U.S. and China. Even though the industry cycle is turning, if the global economy is getting into a slowdown, these emerging markets will surely suffer, too. The risk of geopolitical conflict between China and Taiwan is perhaps the biggest concern for investing in Avantis Emerging Markets Equity ETF. Nonetheless, with earnings forecasts having already fallen deeply across all these economies, the markets may have more upside potential. The Indian economy, although is doing really well, fails to attract adequate attention from U.S. investors. Moreover, if other EMs start performing well, funds may get redirected from India to those markets.

Investment Thesis

India is witnessing a return of foreign investors as well as an unprecedented boom in retail investing. Growth potential of South Korean and Taiwanese economies due to their chip dominance is here to stay for another decade. China has removed all types of covid restrictions, and is providing policy support for its troubled real estate sector. As the U.S. is experiencing a very high inflation rate, these emerging markets are not witnessing such a huge spike in inflation. This difference is leading to an exchange rate that favors investments in these emerging markets. In the near future, these emerging markets possess the capability of becoming a safe haven for many investors.

Avantis Emerging Markets Equity ETF has done the right thing by investing three-fourth of its assets in high growth emerging markets of China, Taiwan, India and South Korea; with strategic allocation in specific high-growth sectors of each of these markets. Despite that, the fund has failed to generate decent yield and acceptable price growth. The only good news is the fund’s 12.26 percent price hike this year.

Now, the larger question remains, can any investor bank on AVEM’s future potential considering such a low yield and poor price growth. In my opinion, existing investors must hold on with their investments, as the market is not offering any premium at present. However, it's still not lucrative enough for U.S. investors to accumulate further units of this EM fund.

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