With small-cap stocks sagging, they’re easily ignored by some investors. The same goes for international equities, which have long vexed U.S. investors.
On the other hand, it’s often a good time to consider certain asset classes when they’re deeply out of favor with the broader investing public. The Avantis International Small Cap Value ETF (AVDV) is an example of an exchange traded fund that offers opportunity that could be going overlooked by market participants.
The fund, which holds 1,272 stocks from ex-U.S. developed markets, looks to beat the MSCI World ex-U.S. Small Cap Index. While there are a slew of U.S.-focused small-cap value ETFs, the universe is significantly smaller when it comes to international stocks, and in the eyes of some analysts, AVDV is among the pick of that litter.
“There aren’t many foreign small-value ETFs available and even fewer worth considering. But AVDV stands out from its peers by focusing on profitable small companies trading at attractive price multiples—a combination of factors that increases its odds of holding future winners,” noted Morningstar analyst Daniel Sotiroff.
At the sector level, the $1.66 billion AVDV has many of the hallmarks of a domestic value ETF. The Avantis ETF allocates 57% of its combined weight to industrial, financial services, and materials stocks. An 11% weight to energy names is helping the ETF’s cause this year, too.
Another point of allure with AVDV comes by way of remembering that value is one thing and quality is another ballgame altogether. That is to say, some value stocks have their reasons for being inexpensive, some of which aren’t positive. Conversely, when an investor finds a favorably valued quality stock, that could a security worthy of further examination.
“AVDV’s portfolio has a stronger emphasis on profitable companies than most foreign small-value ETFs,” concluded Sotiroff. “Some of its holdings don’t immediately pass the sniff test as value stocks, but that’s intentional. Certain growth stocks can make their way into this portfolio if they trade at attractive multiples relative to their profits. Despite incorporating these more expensive names, the ETF still performs much like a small-value portfolio, and it may be used to round out a globally diversified portfolio.”
AVDV’s top 10 country exposures combine for over 80% of the fund’s weight. The big players in the group are Japan, the U.K., and Canada — a trio representing 52% of the fund’s roster.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
