AVDV: A Strong Diversifier For International Small Value Investors (NYSEARCA:AVDV)

One day in my lifetime, international small-cap value will be the market leader. Assuming I live forever, of course. Let’s face it – we’ve been in a US large-cap Tech-driven world for well over a decade. At some point, a rotation takes place. When that is, is anyone’s guess, but whenever the tide turns to favor international small-value, the Avantis International Small Cap Value ETF (NYSEARCA:AVDV) may be worth considering. AVDV is an ETF that seeks to achieve long-term capital appreciation. It primarily invests in a broad set of non-U.S. developed small-cap companies that are believed to be trading at low valuations and exhibiting higher profitability ratios.

This fund is not merely designed to track a specific index. Instead, it combines the benefits of passive indexing, such as diversification, low turnover, and transparency of exposures, with the ability to add value through informed investment decisions based on current prices. This unique hybrid approach sets AVDV apart from many other ETFs in the market.

ETF Holdings: A Closer Look

No position makes up more than 1.12% of the fund, making this highly diversified. These are all companies that, for the most part, I know nothing about – which makes this even more appealing to diversify against companies we all hear and talk about daily.

From a country allocation perspective, the biggest weighting goes to Japan at 30%, with the UK and Australia 2nd and 3rd respectively. The Japan weighting has clearly helped, given how strong Japan’s markets have been in the past year.

Sector Composition and Weightings

AVDV’s sector allocation is another critical aspect to consider. The fund’s holdings span various sectors, providing a diversified portfolio that reduces the risk associated with any single sector. The biggest weighting here goes to Industrials at 23%, followed by Financials and Materials. Tech makes up just 5% – something I consider to be a big plus at this point in the cycle overall.

Peer Comparison: How does AVDV Stack Up?

Perhaps the closest comparison for international small-cap value might be to look at one of the larger players touching on the space through the iShares MSCI EAFE Small-Cap ETF (SCZ). As we can see from the price ratio below, AVDV has solidly outperformed and is hovering around new relative highs. The momentum does not seem to be abating here just yet for AVDV. The performance differential seems more to be driven to be the sector allocation mix being different overall, combined with the fact that SCZ likely has more “zombie companies” internationally than AVDV which are at risk of default given higher for longer interest rates.

The Pros and Cons: Is AVDV a Good Investment?

Like any investment, AVDV comes with its pros and cons. Let’s look into them:

Pros

1. Diversification: AVDV’s broad exposure to non-U.S. developed small-cap companies across various sectors offers diversified investment opportunities.
2. Investment Strategy: The fund’s strategy of combining the benefits of indexing with the ability to add value through informed investment decisions based on current prices is a unique approach that could potentially enhance returns.
3. Efficient Portfolio Management: AVDV’s portfolio management and trading process is designed to enhance returns while minimizing unnecessary risks and costs for investors.

Cons

1. Market Volatility: Small-cap stocks, such as those AVDV invests in, are typically more volatile than larger, more established companies. This volatility can lead to significant price swings, increasing the risk of losses.
2. Currency Risk: As an international ETF, AVDV is exposed to currency risk. Fluctuations in exchange rates can impact the fund’s returns.

Conclusion: Should You Invest in AVDV?

In conclusion, the Avantis International Small Cap Value ETF offers a nice, diversified return stream to most equity portfolios. Its portfolio and unique investment strategy could potentially enhance returns. However, like all investments, it comes with risks, including market volatility and currency risk. Personally, what I’d like to see before allocating here is sustained Dollar weakness, given that the currency dynamics could result in suboptimal total return. Still, I think it’s a good fund considering the cycle we are in. The hybrid indexation with active makes it unique, and worth keeping on a watch list, if not allocating a starter position in.

Markets aren’t as efficient as conventional wisdom would have you believe. Gaps often appear between market signals and investor reactions that help give an indication of whether we are in a “risk-on” or “risk-off” environment.

The Lead-Lag Report can give you an edge in reading the market so you can make asset allocation decisions based on award winning research. I’ll give you the signals–it’s up to you to decide whether to go on offense (i.e., add exposure to risky assets such as stocks when risk is “on”) or play defense (i.e., lean toward more conservative assets such as bonds/cash when risk is “off”).