AVUS - AVUS: An Upgrade To VTI

2023-12-28 13:34:06 ET

Summary

• AVUS is an ETF from Avantis that aims to provide US stock market index investors with a mild factor tilt towards size, value, and profitability factors.
• While the factor tilts aren't large, AVUS has outperformed VTI in recent years while carrying similar risks.
• The expense ratio may shy away some investors who are comfortable optimizing their own factor tilts.
• In respect to VTI, it seems AVUS is an upgrade.

A Better VTI?

Launched in late 2019, Avantis US Equity ETF (AVUS) is a relatively new ETF from Avantis designed for US stock market index investors who also want a mild factor tilt. This single-fund solution aims to simplify portfolio management while offering potential long-term benefits through strategic tilts towards undervalued, cheap and profitable equities. This article covers the factor loading of AVUS vs VTI and the performance it follows. I then give my opinion on whether AVUS is a better version of VTI or not.

Factor Loading

Before diving into AVUS, let's consider factor investing. It involves strategically overweighting certain aspects within equities, known as factors, believed to offer higher expected returns in the long run. Avantis, known for their expertise in this area, brings us AVUS. I previously wrote an article on Avantis U.S. Small Cap Value ETF (AVUV). If you are not familiar with factor investing, or Avantis, I recommend taking a look as it dives in the deeper fundamentals of the capital asset pricing, Fama French factor models and the history of Avantis. Investing in Avantis funds require high conviction of the asset selection process and the members of the team in my opinion.

Similar to the Vanguard Total Stock Market Index Fund ETF (VTI), AVUS aims for broad US market exposure. However, it subtly tilts towards equities exhibiting value (low price relative to book value), small market caps, and strong profitability characteristics. While these tilts are slight, they aim to give AVUS a potential edge over the long term. I ran factor loadings in portfolio visualizer for the two funds and recreated the table below.

As expected, the Beta in respect to the market risk premium, or expected rate of return minus risk-free rate of return ("Rm-Rf") is virtually identical at 1.00 for AVUS and 0.99 for VTI. However, the rest of the factors is where the two funds differ.

For the size premium, or small minus big ("SMB"), AVUS has a factor exposure of 0.09 (9%) and -0.01(-1%) for VTI. This means AVUS "tilts" to the size premium by about 10%.

And the Value premium, High minus Low ("HML"), AVUS has a factor exposure of 0.17 (17%) compared to 0.03 (3%) of VTI. Again, AVUS "tilts" to the value premium by about 15%.

The profitability premium, Robust minus weak ("RMW") is about 2% more tilted in AVUS. The investment premium, Conservative minus Aggressive ("CMA"), doesn't differ too much from each fund.

Overall, it seems AVUS carries the same risk as VTI, but AVUS tilts about 10% to the size premium,15% to the value premium, and 2% to the investment premium. So, how have the two funds performed comparatively?

Since 2020, AVUS has touted a total return of 36.23% with VTI a 28.20%. It seems during this timeframe, the factor of tilting may have helped provide a better performance.

Concentration And Risk

In my previous article, VTI Vs. VOO: Don't Miss A Possible Needle , I made the argument that VTI is better than [[VOO]] because it is a better representation of the "haystack". This is because VTI holds virtually all US stocks, regardless of size, thus more diversified and VOO only holds the top 500 or so by market cap. This was simply a take on the agnostic approach to investing, where the investor should stop searching for the needle. And now with our evidence of small cap factors, we can see holding small cap size companies may be very advantageous for risk adjusted returns. I still stand by this thesis.

However, this argument of favoring diversification doesn't really hold up when VTI holds around 1500 more stocks than AVUS. By this metric, one would say VTI is the better "haystack". While I don't think this is necessarily wrong based on one's investment style or goals, I believe something could be said about the Assets in the top 10 of 19.04% for AVUS versus 27.24% for VTI. As expected, VTI is more concentrated in larger cap stocks, as seen by the tilt. There is quite a bit of empirical evidence showing it is beneficial to tilt to the smaller cap side. Though past performance is not indicative of future performance, it seems AVUS provides a "higher quality haystack" than VTI.

On the Right Path

One appealing aspect of AVUS is its single-fund convenience. However, its higher expense ratio (0.15%) compared to VTI (0.03%) raises questions about its cost-effectiveness. For die-hard factor investors, AVUS's light tilts might seem insufficient. They may prefer a combination of cheaper ETFs, like 85-90% VTI and 10-15% AVUV, to achieve similar factor exposure at a lower cost.

Whether AVUS is right for you depends on your priorities. If you value simplicity and are comfortable with the higher expenses, AVUS could be a suitable option. However, cost-conscious investors might find cheaper alternatives equally effective.

Overall, I view AVUS as a "Bike with Training Wheels". It lets the investor expose themselves to factor investing while not needing to be a complete expert. As the investor learns more about factor investing, then they can gravitate away from AVUS and towards a more active approach if they so wish. However, for those that want to coast through life without worrying about the optimal ratio of factors, I would never dismiss someone investing in this fund. In fact, given a choice between AVUS and VTI, I believe AVUS is a superior fund.

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