ACWI - AVGE ETF: The Jury Is Still Out On This Actively Managed Global Equities Strategy

2023-11-02 16:38:40 ET

Summary

• AVGE is an actively managed ETF that aims to enhance returns by adjusting sector exposures and style tilts across global stocks.
• AVGE has underperformed category benchmarks in its first year, but more data is needed to determine if the strategy delivers alpha.
• With a bullish outlook on stocks, we expect the fund to deliver positive returns going forward.

The Avantis All Equity Markets ETF ( AVGE ) offers diversified exposure to global stocks across developed and emerging markets through an actively managed strategy. In contrast to indexed exchange-traded funds, the idea here is for the AVGE investment management team to adjust sector exposures and style tilts in an effort to ultimately enhance returns.

That being said, just past the one-year anniversary of the fund's inception date in 2022, the data shows AVGE has underperformed category benchmarks more recently. Ultimately, we'll need more data over a long time frame to confirm if the strategy delivers alpha.

In our view, AVGE could work as a core portfolio-holding for investors but it's important to recognize some of the key differences in the fund's approach driving its performance spread.

What is the AVGE ETF?

AVGE is offered by Avantis Investors, a group within "American Century Investments" recognized as an institutional asset manager with more than 60 years of history.

The attraction of AVGE as an "all equity markets" fund goes back to the textbook benefits of indexing considering the broad diversification, and a long-term time horizon. Without being constrained to the stock market of a single country like the U.S. or a particular market segment, global stocks are the best representative of equities as an asset class.

In this case, instead of holding a portfolio of thousands of different companies, AVGE utilizes separate ETFs within the Avantis fund family to achieve its objective. By this measure, AVGE can be considered an "ETF of ETFs", recognizing that each of the underlying holdings is also actively managed to target a specific segment of the market.

The Avantis US Equity ETF ( AVUS ) is the largest current holding representing 43% of the portfolio. This fund with more than 2,200 stocks is intended to be an alternative to a broad-market U.S. equity exposure, including high-profile mega-cap leaders like Apple Inc ( AAPL ) and Microsoft Corporation ( MSFT ).

The weighting towards the U.S. stock market is consistent with the market capitalization of the underlying companies and otherwise importance as global leaders.

Still, international stocks are well-represented including through funds like the Avantis International Equity ETF ( AVDE ), Avantis International Large Cap Value ETF ( AVIV ), and Avantis Emerging Markets Equity ETF ( AVEM ) within the top five holdings.

Overall, it is fair to say that all the global equity bases are covered with AVGE indirectly holding more than 3,000 stocks through the underlying ETFs keeping in mind that there may be some overlap between funds.

By country allocation, the United States represents 70% of the exposure followed by Japan at 4%, the United Kingdom at 3%, and China at 3%. The apparent "overweighting" towards the U.S. and developed markets highlights the views of the fund management team favoring U.S. stocks but still relatively close to the benchmark "MSCI All-Country World Index" at approximately 63%.

Where AVGE differentiates itself becomes more evident at the sector level, where the exposures are tilted according to its actively managed strategy.

AVGE stands out with a large spread underweight the Technology sector representing 14.5% of the fund in contrast to the 23% in iShares MSCI ACWI ETF ( ACWI ) which we use here for reference purposes as passively tracking the All-Country World Index benchmark.

We can also consider the separate Vanguard Total World Stock Index Fund ETF Shares ( VT ) has an even higher weighting towards Technology, currently at 27% of the fund. VT tracks the alternative "FTSE Global All Cap Index" covering large and small-cap global companies.

The other sector with a large deviation relative to the benchmark is Energy where AVGE maintains an 11% exposure, well above the 5% in ACWI.

What we find is that those allocation decisions through the underlying equity ETFs in the AVGE portfolio have likely contributed to the fund's lagging performance. Over the past year, AVGE has returned 7% compared to 13% for ACWI and VT.

Simply put, a major market theme this year was the strength in technology, while energy stocks, big winners in 2022, lost momentum. From the chart below, we can see that a performance spread widened back in Q1 coinciding with the market volatility related to the U.S. banking turmoil at the time. AVGE's positioning in the underperforming Financial sector as the largest exposure, 17% of the fund, was also detrimental to its total return.

What's Next for AVGE?

The big question here is why an investor should choose AVGE compared to an indexed ETF like ACWI or VT. The first point we want to make clear is that even as AVGE has slightly lagged by a few percentage points from its inception, it's possible the fund's approach will outperform going forward.

With the current positioning, AVGE shareholders sort of want to see other sectors beyond Tech leading higher. Energy has been volatile, but could very well gain momentum assuming oil prices rebound. Near-term trends like easing inflationary pressures and stabilizing interest rates could provide a tailwind for risk sentiment and broader cyclical sectors into 2024.

There is also the dynamic where the Avantis fund managers can adjust the exposure meaning the country and sector allocations could look different over the next year. The takeaway here is that it's too early to dismiss the fund just because of a disappointing short-term move.

We'd also bring up the fund's expense ratio of 0.23% is very reasonable for the category and even below ACQI at 0.32%. The Avantis fund family has done a good job of keeping that cost down adding to its allure as an actively managed ETF.

Final Thoughts

AVGE is a high-quality fund that represents a unique approach to a global equities strategy ETF and is a compelling option for investors.

With an optimistic outlook on the global economy and a bullish view of stocks, the expectation is that AVGE is well-positioned to rally higher and continue to deliver a positive total return over the long run.

In terms of risks, equities remain exposed to shifting macro trends. The potential for a deterioration of the global economic outlook defined by a sharp turn lower in consumer spending or significantly higher interest rates would represent a bearish backdrop for AVGE, opening the door for a deeper selloff.

While the fund does a good job of diversification across stocks, investors should also consider the importance of fixed income and even alternative investments like precious metals and commodities for more complete diversification.

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