A look at the AVUV Small Cap ETF
I first heard about the Avantis US small cap value ETF over on the boglehead forum. Many investors are using this ETF to tilt their portfolio towards small cap value. Why? Because there’s past evidence of small cap value outperforming the TOTAL MARKET over the long-term. However, keep in mind, as the old saying goes,
“Past performance is no guarantee of future results”
Both value and small cap stocks have under performed the last ten years or so. Tilting towards small cap value by buying AVUV is a bet that things will revert to the mean. For this year, I must mention that value HAS been a better place to tilt towards than growth.
Brief Company Information-Avantis Investors was established in 2019 and consists of former employees of the Dimension Fund advisors. It’s backed by American Century Investments. This is a relatively new offering and “company” despite their employees having lots of experience.
Brief Performance Note: Over the last year, the price of AVUV is up 2.62%. So, it has outperformed the market over this duration. For comparison, SPY (S&P 500) is down 13% over the last 52 weeks.
- Active Management
- Diversification of AVUV
- Sector Exposure
- Top Holdings of AVUV
- AVUV ETF Overlap
- Fundamental Analysis
- Cons of investing in AVUV
- Final Decision
The AVUV ETF is an ACTIVE managed ETF. I don’t talk about actively managed funds much here. I initially found it a bit odd this fund was recommended on the Bogleheads forum because they tend towards passive investing. What’s the first thing you think of when you think of active funds? Fees! What exactly are those fees?
The expense ratio is 0.25%.
This is a bit higher than our average passively managed fund, but .25% is extremely reasonable for an actively managed fund. This is at the lower end of the spectrum for active funds. Heck, even my IJJ fund has an expense ratio of .18%.
Annual turnover for this fund is 22%. That’s great for an active fund, with fewer tax consequences. Most active funds have somewhere in the neighborhood of 50% for a turnover rate.
AVUS contains 643 holdings. This is less than it’s benchmark, the Russell 2000 Value Index, but still enough to offer diversification for a basic portfolio. I’m assuming you’d already own a total market or S&P 500 fund if you’re interested in this.
Let’s look at the holdings in more detail.
What is the sector exposure of AVUV?
- 33% Financial
- 14.6% Energy
- 9.6% Retail
- 6.2% Transportation
- 3.66% Electronic Tech
There are of course other sector exposures. I wanted to include the tech numbers so you can see how much different it is from the Total Market. For example, ITOT has over 25% tech weighting while AVUV has less than 4%.
Like my IJJ holding, the financial and energy sectors are what’s providing the VALUE and slightly higher dividend yield.
Top Holdings of AVUV
- SM Energy
- Matador Resources
- PDC Energy
- Murphy Oil Corporation
- Lousiana Pacific Corporation
You can see the concentration of energy stocks and the industrial sector in the top portion. From a size perspective-54% of the holdings are mid cap and 41% are pure small cap stocks. If you’ve read my blog before, you know I hold IJJ. This is exactly why I haven’t added AVUV to my holdings-it contains a good bit of mid cap value and I already have more than enough exposure to that. One would want to consider whether or not the extra exposure to not only energy stocks but small cap energy stocks is something they’d want in their portfolio.
AVUV currently has a dividend yield of 1.7% with two years of a growing dividend. Most total market ETF’s are paying less than a 1.5% dividend; therefore, this does bring in just a bit more income. This could also come into play if you wanted to minimize dividends for tax purposes.
ETF Overlap Analysis
I always like to look at FUND overlaps with the Total Market (ITOT is my standard here). 95.2% of AVUV holdings are in ITOT. So, you aren’t getting a whole lot of new holdings; you’re only getting a more concentrated bet into those companies. 80% of AVUV is in the Russell 2000 (IWM ETF). One thing I would consider doing is looking at the overlaps above and making sure these are indeed companies I’d want more exposure too.
- P/E is 10.73
- P/B is 1.42
By contrast ITOT is sitting at a P/E of 17 and a P/B of 3.14. Those are the fundamentals showing you the value aspect of this ETF. It’s up to you to decide if this sort of value investing is appealing.
What are the CONS of investing in AVUV?
1)During a recession, small-cap stocks often get clobbered. This is because many don’t have the strong balance sheets of your established large cap stocks.
2)For the last decade, Value has under performed growth. There are no guarantees that this will change over the next ten years.
3)One has to ask if the added expense ratio is worth the return you would get with a more passive small cap value ETF?
4)I know this fund has ample volume and assets under management. However, it has not been around long. It’s inception date is Sept, 24th 2019. It doesn’t have much history.
My Final Decision
I’m holding off on AVUV; once again, this is largely because IJJ makes up a good bit of my portfolio already. On the other hand, I do see a place for this one in my brokerage account. I’m holding off to see how the market moves from here to add though. I personally don’t want any more small cap exposure at this exact moment. In the event of a bigger downturn, I’ll probably scoop this one up.
Please leave a comment and let me know what you think about this ETF? If you already hold it yourself.