AVDV: Best Of Breed Global Small-Cap ETF

This ETF review series aims at evaluating products regarding the relative past performance of their strategies and quality metrics of their current portfolios. Holdings and their weights change over time: reviews are updated when necessary.

AVDV strategy and portfolio

The Avantis International Small Cap Value ETF (NYSEARCA:AVDV) was launched on 09/24/2019. As of writing, it has 1281 holdings, a 12-month distribution yield of 2.68% and a total expense ratio of 0.36%. Distributions are paid semi-annually. AVDV is an actively managed fund investing in small caps with value and profitability characteristics. It doesn’t track an index.

As described in the prospectus by Avantis Investors,

The portfolio managers define “value characteristics” mainly as adjusted book/price ratio (though other price to fundamental ratios may be considered). The portfolio managers define “profitability” mainly as adjusted cash from operations to book value ratio (though other ratios may be considered). The portfolio managers may also consider other factors when selecting a security, including industry classification, the past performance of the security relative to other securities, its liquidity, its float, and tax, governance or cost considerations.

Despite its name, AVDV is quite balanced between mid-cap companies (about 55% of asset value) and small caps (about 45%).

I will use the Vanguard FTSE All-World ex-US Small-Cap ETF (VSS) as a benchmark. Japan is by far the heaviest country with 27% of asset value, followed by the U.K. (14%), Canada (11%) and Australia (10%). Other countries are below 5%. Compared to VSS, AVDV significantly overweights Japan, the U.K. and Australia. The next chart plots the top 10 countries, representing 84% of assets.

The portfolio has three major sectors: Industrials (21%), financials and materials (19% each). Consumer discretionary and energy are at 11%, then other sectors are below 5%. Compared to VSS, AVDV overweights financials, materials and energy. It underweights real estate, technology, healthcare, and utilities.

As expected for a value exchange-traded fund (“ETF”), AVDV is much cheaper than VSS regarding the usual valuation ratios, listed in the next table.

	AVDV	VSS
Price / Earnings TTM	6.92	10.66
Price / Book	0.9	1.27
Price / Sales	0.51	0.84
Price / Cash Flow	4.34	7.54

Click to enlarge

(Data source: Fidelity.)

The top 10 holdings, listed in the next table, represent 6.12% of asset value. The heaviest one weights 0.78%, so risks related to individual stocks are very low.

NAME	ISIN	WEIGHT	COUNTRY
CEMBRA MONEY BANK AG COMMON STOCK CHF1.0	CH0225173167	0.78%	SWITZERLAND
JOHNSON MATTHEY PLC COMMON STOCK GBP1.109245	GB00BZ4BQC70	0.70%	UNITED KINGDOM
PACIFIC BASIN SHIPPING LTD COMMON STOCK USD.01	BMG684371393	0.62%	HONG KONG
BANCA POPOLARE DI SONDRIO COMMON STOCK NPV	IT0000784196	0.60%	ITALY
ILUKA RESOURCES LTD COMMON STOCK	AU000000ILU1	0.58%	AUSTRALIA
CRESCENT POINT ENERGY CORP COMMON STOCK NPV	CA22576C1014	0.58%	CANADA
AUSTRIA TECHNOLOGIE + SYSTEM COMMON STOCK	AT0000969985	0.58%	AUSTRIA
ASR NEDERLAND NV COMMON STOCK EUR.16	NL0011872643	0.57%	NETHERLANDS
TATE + LYLE PLC COMMON STOCK GBP.2916667	GB00BP92CJ43	0.56%	UNITED KINGDOM
LANXESS AG COMMON STOCK	DE0005470405	0.55%	GERMANY

Click to enlarge

Past performance

Since inception, AVDV beats VSS by almost 10 percentage points in total return, and it is on par with the U.S small-cap index iShares Russell 2000 ETF (IWM). A 3-year history is too short to assess a strategy, but it is encouraging.

since 10/1/2019	Total Return	Annual Return	Drawdown	Sharpe ratio	Volatility
AVDV	24.74%	6.98%	-43.01%	0.28	25.13%
VSS	14.92%	4.34%	-39.81%	0.16	23.11%
IWM	24.77%	6.99%	-41.07%	0.29	25.75%

Click to enlarge

Data calculated with Portfolio123

The next chart compares all global small-cap ETFs with more than $500,000 in asset value, since AVDV inception. AVDV outperforms all of them. The only one coming close is the iShares MSCI Intl Small-Cap Multifactor ETF (ISCF).

Takeaway

Avantis International Small Cap Value ETF is an actively managed international small-cap fund focused on value and profitability. It is much cheaper than a global small-cap benchmark regarding valuation metrics. As profitability is part of the strategy, we can expect AVDV to avoid a lot of value traps. Almost 60% of asset value is in 3 sectors: industrials, materials and financials, with about 20% in each of them. No sector weights more than 21%, and no holding weights more than 1%. Japan is the heaviest country with 27%. Price history is short, but promising: since its inception, AVDV has beaten most, if not all, of its competitors in the same category. Moreover, the yield of 2.7% is attractive for dividend-oriented investors who are looking for international diversification.

For transparency, a part of my equity investments is split between a passive ETF allocation (AVDV is not part of it) and my actively managed Stability portfolio (14 stocks), disclosed and updated in Quantitative Risk & Value.