AVUV - AVUV Vs. XSVM: Active Small-Cap Value ETFs Use Different Strategies

2023-05-03 08:00:00 ET

Summary

• The Avantis U.S. Small Cap Value ETF is an actively managed ETF focused on Value stocks in the Small-Cap part of the US stock market.
• The Invesco S&P SmallCap Value with Momentum ETF invests in the same part of the US stock market but adds a momentum factor into their process.
• This article review both ETFs and the index used by XSVM. A partial list of other SCV ETFs is provided too.
• Since AVUV started in late 2019, both ETFs show similar results and more importantly, have beaten the Large-Cap stocks of the S&P 500 Index.
• I think both ETFs are better than VBR but I only give XSVM a Buy rating currently. Its momentum strategy should move it into better sectors as the economy shifts.

(This article was co-produced with Hoya Capital Real Estate )

Introduction

For the past fifty years, Small and Mid-Cap stocks have outperformed Large-Cap stocks, though the Sharpe ratio has Large-Cap slightly better than Small-Cap; Mid-Cap wins on both CAGR and Sharpe measurements. That fact gets lost due to Large-Cap dominance over the last 5- and 10-years periods, led by those huge Technology stocks.

More recent times have shown Small-Cap stocks outperforming yet that has reverse itself in 2023, with Large-Cap on top once again. For those investors who believe in the reversion-to-the-mean concept, Small-Cap stocks would provide better returns over the next 5-10 years. That seems to have started for the Value part of the Small-Cap universe compared to the Value stocks of their larger cousins.

Based on the reversion concept, I chose to compare here a pair of Small-Cap Value ETFs that differ in two important ways:

• Active vs. Index investment selection process
• Without or With momentum factoring process

The two ETFs reviewed are:

• Avantis U.S. Small Cap Value ETF ( AVUV )
• Invesco S&P SmallCap Value with Momentum ETF ( XSVM )

I think both ETFs are better than VBR but I only give XSVM a BUY rating currently. Its momentum strategy should move it into better sectors as the economy shifts.

Avantis U.S. Small Cap Value ETF review

Seeking Alpha describes this ETF as:

The investment seeks long-term capital appreciation. The fund invests primarily in a diverse group of U.S. small cap companies across market sectors and industry groups. Under normal market conditions, it will invest at least 80% of its assets in securities of small capitalization companies located in the United States. The fund also may invest in derivative instruments such as futures contracts, currency forwards, and swap agreements. Benchmark: Russell 2000 Value TR USD. AVUV start in the fall of 2019.

Source: seekingalpha.com AVUV

AVUV has $5.37b in AUM and has a very reasonable 25bps fee; low compared to most actively managed ETFs. The TTM Yield is only 1.9%.

American Century Investments provides the following points on why their AVUV should be consider.

• Invests in a broad set of U.S. small-cap companies and is designed to increase expected returns* by focusing on firms trading at what we believe are low valuations with higher profitability ratios, a measure of a company's profitability relative to its book value.

• Pursues the benefits associated with indexing (diversification, low turnover, transparency of exposures), but with the ability to add value by making investment decisions using information in current prices.

• Efficient portfolio management and trading process that is designed to enhance returns with the goal of reducing unnecessary risks and costs for investors.

• Built to fit seamlessly into an investor's asset allocation.

Source: avantisinvestors.com/ AVUV

AVUV holdings review

The current sector allocation is:

The active strategy is heavily weighted toward stocks that will do well in a strong economy, which should be a concern currently with the FOMC planning more hikes. When compared to the Vanguard Small-Cap Value ETF ( VBR ), that shift becomes very apparent. The almost 27% allocation to Financials is a concern currently; another source showed banks were 16% of the portfolio.

These stocks represent just under 16% of the portfolio of over 700 stocks. The Top 100 stocks account for 50% of the weight, the remaining 600+ the rest. Unlike some Large-Cap ETFs, no stock or stocks dominate the portfolio, which lowers the risk but also possibility of a sudden upward spike in value.

AVUV distribution review

While payouts show some improvements in 2022, the sub 2% yield is not going to attract income investors. That recent payout spurt helped AVUV get aa "A+" rating on this ETF factor.

Invesco S&P SmallCap Value with Momentum ETF review

Seeking Alpha describes this ETF as:

The Invesco S&P SmallCap Value with Momentum ETF invests in value and momentum stocks of small-cap companies. The fund seeks to track the performance of the S&P SmallCap 600 High Momentum Value Index , which is designed to measure the performance of 120 stocks in the S&P SmallCap 600® Index that have relatively high "value" and "momentum" scores. XSVM started in 2005.

Source: seekingalpha.com XSVM

XSVM is much smaller than AVUV with just $612m in AUM. Fees here are 36bps, high for an index-based ETF. The TTM Yield comes in at 1.66%.

Index review

S&P provides this description:

The S&P SmallCap 600 High Momentum Value Index is designed the measure the performance of 120 stocks within the S&P SmallCap 600 with attractive valuations with a momentum overlay.

Source: spglobal.com Index

Invesco adds more details to the above description.

The Invesco S&P SmallCap Value with Momentum ETF is based on the S&P 600 High Momentum Value Index (Index). The Fund will invest at least 90% of its total assets in the component securities that comprise the Index. The Index is composed of 120 securities in the S&P SmallCap 600® Index having the highest "value scores" and "momentum scores," calculated pursuant to the index methodology. Index constituents are weighted by their value scores; securities with higher value scores receive relatively greater weights. The Fund and the Index are rebalanced and reconstituted semi-annually.

Source: invesco.com XSVM

The following describes the momentum factor and its implementation process.

XSVM holdings review

Again, starting with sectors, we see similar top sectors but not the same allocations as will be shown later.

I really like it when the data includes the sector as every name, especially in Small-Cap ETFs, might not be known to the reader.

With just under 120 holdings, the Top 20 here account for a larger share of the portfolio; just under 31%. It takes 40 stocks to reach the 50% weight.

XSVM distribution review

After showing a nice increase since COVID hit, payouts have been level-to--lower since the end of 2021. That doesn't play well with the scoring system and thus Seeking Alpha gives XSVM only a "C+" grade.

Comparing ETFs

Here is how the two ETFs compare when it comes to sector allocation.

With AVUV holding vastly more stocks, this results in most of XSVM holdings being held by AVUV even though the weight overlap is only 18%. As for sector differences, AVUV's overweight in Financials stands out. Momentum is favoring Industrials and Materials for XSVM, two sectors that should lose momentum if the US goes into a recession later in 2023.

When I looked at the Vanguard Equity Style boxes, the differences were extremely small so I chose not to actually included them here. Here are some common equity factors investors look at.

The price ratios favor XSVM while the growth data favors AVUV. For the CAGR compare, I added the SPDR S&P 500 ETF ( SPY ) since it represents the "market" to many investors. Also included a bellwether ETF for SCV stocks, the Vanguard Small-Cap Value ETF mentioned earlier.

Over the sub-four-year history for AVUV, it and XSVM have the same results, though the momentum did well during the strong market year of 2021, giving its outperformance all back during the down market of 2022. Both ETFs review did better than both SPY and VBR.

Looking at some measures of risk, we see both of the reviewed ETFs had the highest StdDevs and largest Max Drawdowns. While the Sharpe and Sortino ratios placed them above VBR, the SPY ETF had the best despite its lower CAGR.

Portfolio strategy

As with almost any ETF investment strategy, there are numerous ETFs with various approaches even with that equity class. My fellow HCIB contributor, Sunday Investor , provided me with the following expanded list of SCV ETFs.

As mentioned, even within the SCV sector, there are various options to pick from and the results vary widely. A second Active strategy, the Opus Small Cap Value ETF ( OSCV ) turns five later this year but so far trails AVUV by a wide margin.

Final thoughts

There are many Small-Cap ETFs to pick from besides Value and/or Momentum oriented ones. AVUV is one of the few ETFs in this market segment that is not tied down by an index; the CEF universe provides choices for those will to take on leverage costs and benefits. Within the ETF universe, I published two articles comparing each one covered here against another Small-Cap ETF.

• I Replaced IJS ETF With XSVM ETF: Good Timing?
• RZV Vs. AVUV: No Consistent Winner In The Small-Cap Value Space

For further details see: