2023-04-26 07:25:12 ET
Summary
- Value stocks have outperformed these past few years.
- Valuations remain depressed, so outperformance could continue.
- AVLV is a simple, strong U.S. large-cap value ETF, has outperformed since inception, and could continue to outperform.
Author's note: This article was released to CEF/ETF Income Laboratory members on April 6th.
The Avantis U.S. Large Cap Value ETF ( AVLV ) is an actively-managed U.S. large-cap value ETF. AVLV's diversified holdings, cheap valuation, and good performance track-record make the fund a buy. With a 2.1% yield, the fund is an ineffective income vehicle.
AVLV - Overview and Benefits
Diversified Holdings
AVLV is an actively-managed U.S. large-cap value ETF. Although the fund is actively-managed, it tries to provide (roughly) comparable diversification to that of most index funds. AVLV seems to succeed in this, with investments in over 200 securities from all relevant industry segments. Largest of these are as follows.
AVLV - Chart by Author
As can be seen above, the fund's largest holdings are all well-known, blue-chip stocks, including dividend investor favorites Exxon ( XOM ) and Pfizer ( PFE ). As the fund does not directly target high-yield stocks, investors should not expect a lot of income, or significant investments in income holdings.
AVLV's industry exposures are as follows. Benchmark refers to the Russell 1000 value index, as tracked by the iShares Russell 1000 Value ETF ( IWD ).
AVLV
As is the case for most value funds, AVLV is overweight old-economy industries, including energy, industrials, and financials, relative to broad equity indexes / the S&P 500. Relative to its benchmark , the fund is overweight energy, underweight real estate, consumer staples, and utilities. AVLV's positioning seems to have been reasonably good in the recent past, with energy outperforming and real estate underperforming during the same. Underweighting utilities and staples seems to have been the wrong call, although the net effect remains positive. Do remember, a fund has to underweight something to overweight the best industries, so missing out on some potential gains is to be expected.
Looking at fund holdings, it seems these overlap 26% with those of the S&P 500.
In my opinion, the above is a relatively healthy percentage. Very low percentages might indicate an incredibly aggressive, niche, or concentrated fund, with all the risks that entails. Too high of a percentage, however, means the fund is a closet indexer, severely limiting the probability and potential magnitude of over-performance. AVLV seems to hit the sweet, with sufficient diversification to reduce risk and (roughly) move in-line with its benchmark, and sufficient differences to make moderate outperformance possible. One can see this exact scenario play out YTD.
For reference, the fund overlaps 30% with its benchmark, not too dissimilar from the S&P 500.
AVLV's diversified holdings reduce risk, volatility, and the probability of significant underperformance, all important benefits for the fund and its shareholders. AVLV is diversified enough to function as a core portfolio holding, in my opinion at least.
Cheap Valuation
AVLV is a value ETF, focusing on industries and stocks with below-average valuations. The fund itself is significantly cheaper than the S&P 500. It is moderately cheaper than its benchmark on a PE basis, roughly equal on PB. The latter is due to overweighting energy stocks, which are generating lots of profits right now, hence the low PE ratios, but which are not trading at significant discounts to their assets / book values.
Fund Filings - Chart by author
Value stocks are always, by definition, cheaper than average, but how much cheaper does vary. Right now, large-cap value stocks of the type AVLV invests in are slightly more expensive than their historical average, a slight negative for the fund and its investors.
AVLV
On a more positive note, large-cap value stocks are looking quite cheap relative to the equity market average, especially growth stocks. As mentioned previously, this is always true, but it is particularly true right now.
JPMorgan Guide to the Markets
Cheaply valued stocks can experience significant capital gains and outperformance, contingent on valuations normalizing. In my opinion, valuations will likely normalize moving forward for two reasons.
First, is the fact that market conditions and fundamentals are pointing towards that direction. Valuation gaps between value and growth stocks are at historically elevated levels. Gaps this wide have not lasted terribly long in the past, and I don't think they'll last long this time around either.
Second reason I believe valuations are likely to normalize moving forward, is the fact that valuations have somewhat normalized since around mid-2020, due to improved investor sentiment. Investors have bid up the price of most value industries and stocks for several years now, with some ebbs and flows, and I see no sign of the trend reversing. Changes in valuations have led to significant value outperformance, as expected. For reference, the performance of some of the more relevant ETFs in this space.
Investors have been rewarding large-cap value stocks with higher prices, valuations, and strong outperformance for several years by now. These stocks remain cheap, so I expect higher prices and outperformance moving forward. AVLV invests in these stocks, will likely benefit from these trends, and is, in my opinion, likely to outperform moving forward.
Good Performance Track-Record
AVLV's performance track-record is reasonably good, with the fund consistently outperforming its benchmark on a total return basis.
AVLV
The fund has also outperformed relative to the S&P 500 since inception, and by a larger, if more inconsistent, margin. Performance suffered in March, almost certainly due to issues in the regional banking industry, but the overall track-record remains quite strong.
On a slightly more negative note, the fund's performance is about average relative to the largest, most well-known value ETFs. Average means just that, with the fund performing right in the middle of the pack.
As the fund is quite young, with inception in late 2021, I wouldn't put too much emphasis on its performance track-record, but the information we have available is broadly positive.
Importantly, the performance track-record of Avantis, the fund's investment manager, is longer, and quite strong too.
Avantis's U.S. small-cap value ETF has significantly outperformed its benchmark since inception, in 2019.
As has the company's international large-cap value ETF.
As has its international small-cap value ETF.
Avantis
Only exception is the company's emerging market value ETF, which has slightly underperformed since inception.
So, most of Avantis's value ETFs have outperformed since inception. In my opinion, this is evidence of the strength and effectiveness of the company's investment management team and strategy. One fund outperforming could easily be a fluke, not so much four out of five.
In my opinion, AVLV's overall performance track-record can be characterized as good. It is not perfect, especially as it is quite short, but the information we have does seem to indicate consistent outperformance and an effective investment strategy.
Conclusion
AVLV is an actively-managed large-cap value ETF. AVLV's diversified holdings, cheap valuation, and good performance track-record make the fund a buy.
For further details see:
AVLV: U.S. Large-Cap Value ETF, Cheap Valuation, Good Performance