AVDV Vs. SCZ: The New ETF Has Proven Its Worth So Far

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

Introduction

My first article on the AVDV ETF (AVDV: The Only Non-Indexed ETF In This Market Segment) highlighted the fact it only uses an index to set market-cap limits, not its asset allocation. As an investor in the iShares MSCI EAFE Small-Cap ETF (NASDAQ:SCZ), part of my annual due diligence is to see if the ETFs I own are still a top performer in their market segment. With just 3+ years of history, for the two ETFs here, it basically comes down to believing the manger’s Active Value strategy for the Avantis International Small Cap Value ETF (NYSEARCA:AVDV) will outperform its older and larger iShares competitor whose ETF includes Growth stocks too. As we will see later, that outperformance only became consistent in January of 2022.

iShares MSCI EAFE Small-Cap ETF review

Seeking Alpha describes this ETF as:

The iShares MSCI EAFE Small-Cap ETF seeks to track the investment results of the MSCI EAFE Small Cap Index composed of small-capitalization developed market equities, excluding the U.S. and Canada. It invests in growth and value stocks of small-cap companies. SCZ started in 2007.

Source: seekingalpha.com SCZ

SCZ has $11.9b in assets, with the managers charging 39bps in fees. The yield is 2.5%.

Index review

MSCI provides this description of their Index:

The MSCI EAFE Small Cap Index is an equity index which captures small cap representation across Developed Markets countries around the world, excluding the US and Canada. With 2,273 constituents, the index covers approximately 14% of the free float-adjusted market capitalization in each country.

Source: msci.com index

Being an EAFE index, Emerging Market stocks, nor North American countries are included. The other ETF allows Canadian stocks, but also excludes EM stocks. MSCI measures the index against six factors.

Besides the obvious overweighting in Small-Caps, the Index scores high in Low-Volatility too. Since market-cap size is critical for the AVDV ETF, here are those measurements for this Index.

SCZ holdings review

Let’s start by looking at the country allocations.

I will compare these and sectors, presented next, later against the AVDV ETF.

Currency exposure, which of course adds currency risk to the picture, is:

Top holdings

Out of 2300 stocks, the Top 20 account for just under 5% of the portfolio. The bottom half, by weight, account for 19% of the portfolio, which is not bad compared to other ETFs I have recently reviewed. SCZ has minor cash positions in 13 currencies, including the USD, plus three equity index futures.

SCZ distribution review

As with many international funds, dividends are semi-annual, as some stocks only make semi-annual payouts. No scorecard was available.

Avantis International Small Cap Value ETF review

Seeking Alpha describes this ETF as:

The Avantis International Small Cap Value ETF is managed by American Century Investment Management Inc. The fund invests in public equity markets of global ex-US region. The fund invests in value stocks of small-cap companies, within the market capitalization range of the MSCI World ex USA Small Cap Index. AVDV started in September 2019.

Source: seekingalpha.com AVDV

AVDV is much smaller but still has $1.6b in AUM. The fees are 36bps, with a Forward yield of 2.5%.

Index review

MSCI describes this Index as:

The MSCI World ex USA Small Cap Index captures small cap representation across 22 of 23 Developed Markets countries (excluding the United States). With 2,499 constituents, the index covers approximately 14% of the free float-adjusted market capitalization in each country.

Source: msci.com index

This is basically the same index as the other except here Canadian stocks are included and account for 10% of the index weight.

That difference did not change the largest or smallest market-cap, which means except for possibly including Canadian stocks, the available universe is the same.

AVDV holdings review

The manager provides both region and country allocation data.

They also provided the sector allocations.

Top holdings

These stocks are about 12% of the portfolio; the bottom half of the nearly 1300 stocks account for just 5% of the portfolio. There are also some small currency positions. The lower half play a much less important role than the lower half of SCZ does.

AVDV distribution review

The limited history make effect the grade given by Seeking Alpha, a “B”.

Comparing ETFs

The first set of charts shows how the two ETFs overlap in what they own.

Because SCZ owns more stocks, a larger percent of AVDV’s stocks are also held by that ETF. The weight overlap is small, partially reflecting the fact one fund owns only Value stocks. It also shows that four sector allocations vary by over 6%. The next chart shows the largest over/under weights between the two ETFs.

Except for SCZ not having an allocation to Canada, the rest of the biggest country allocations do not differ by much.

Since both its start in 2019 and coming off the COVID bottom, AVDV shows better returns. Even with its higher StdDev, AVDV’s has superior risk ratios.

Seeking Alpha provides grades and rankings for US ETFs. This how the Quant ratings view each ETF.

As expected, the sub-class differs. The key here is the Seeking Alpha Quant process ranks the AVDV ETF as best in its sub-class!

Portfolio strategy

If US investors allocate internationally like they do with their US equity holdings, they are light this segment of the equity market. Should they be in it thus is the question to explore.

Is Small-Cap Value the place to be in that segment?

For US stocks, the long-term answer has been yes, so one might expect that to be the case internationally too. It turns out that is not the case.

Before the 2008-09 Great Financial Crisis, international Small-Cap Value and Growth stocks were more correlated; since then, the Growth component has been the best investment between the two. That raises the question: “What ETFs invest in ISCG stocks and how have they done”? Of the over sixty International Small-Cap ETFs, none were growth-focused.

International segment question

Compared to all International or Emerging Markets stocks, how does ISCV compare? Here the picture is mixed, with EM stocks having a slightly better CAGR, but ISCV stocks better risk ratios. Developed market stocks placed third in both measures.

US Vs. International Small-Cap Value question

This question may be appropriate if an investor wasn’t looking at these ETFs for their non-US exposure but for their Small-Cap exposure. Adding the Avantis U.S. Small Cap Value ETF (AVUV) provides a mixed answer.

Both International ETFs have excelled recently, but longer-term data still favors the US Small-Cap ETF.

Final thought

So far, the stock selection process employed by the AVDV ETF has not only beat out the one used by the SCZ ETF; it is going against history of how international Small-Cap Value stocks have underperformed the overall Small-Cap universe. While it is possible that Emerging Market Small-Cap Values explains this, which is in the PV data but not either ETF reviewed, I would be surprised if that was the case, but why guess? While I could not find an EM-SCV ETF, I did find the EM Value version of the index used by AVDV: MSCI Emerging Markets Small Cap Value Index. Comparing its 3-year CAGR to what AVDV did over the same timeframe, we see this Index up 8.54%; AVDV up 7.12%. When looking at the full EM universe, we see it pulled the full international index down, while EM-SCV stocks were a mixed blessing to the international SCV results.

Based on its short track record and relative performance, the AVDV ETF shows better prospects with its Active Value strategy.