Value, for all its struggles, remains a beloved investment factor while quality keeps delivering for investors. The two concepts meet in the Avantis U.S. Equity ETF (AVUS).
AVUS “pursues the benefits associated with indexing (diversification, low turnover, transparency of exposures), but with the ability to add value by making investment decisions using the information in current prices,” according to Avantis Investors. The fund features an “efficient portfolio management and trading process that is designed to enhance returns while seeking to reduce unnecessary risks and costs for investors.”
AVUS, which debuted last year, is potentially attractive for investors looking for alternatives to cap-weighted funds and those looking for long-term core portfolio holdings.
“This strategy offers broad exposure to U.S. stocks of all sizes. It starts with each stock’s market-cap weighting and adjusts them to give overweightings to stocks with low valuations (based on price/book) and high profitability and underweighting to stocks with the opposite characteristics,” said Morningstar analyst Alex Bryan in a recent note.
AVUS is rooted in an academically-supported, market-tested framework aiming to identify securities with expected high returns based on market prices and other company information. Relying on trading and portfolio management processes, the Avantis team analyzes whether the perceived benefits of a trade overcome its associated costs and risk.
The fund’s “dual focus captures the price investors pay and proxies for the value they get. This is based on the observation that current profitability is a good predictor of future cash flows,” notes Bryan. “For any given valuation, stocks with higher profitability should provide higher expected returns. Similarly, if stocks have similar profitability, those with lower valuations should have higher expected returns.”
AVUS invests primarily in a diverse group of US companies of all market capitalizations, across sectors and industries, emphasizing investment in companies believed to have higher expected returns. Additionally, AVUS offers investors a prudent, lower-risk approach to domestic equity exposure.
“This fund doesn’t swing for the fences. Its active share against the Russell 3000 Index is currently only 27%. And it isn’t dependent on an individual stock or sector bets,” according to Bryan. “It doesn’t significantly overweight value stocks either, as more profitable companies tend to trade at higher valuations, placing the portfolio in large-blend territory. While this fund looks a lot like the broad market, its modest tilts toward cheaper and more profitable stocks should help it carve an edge.”
AVUS earns a Bronze rating from Morningstar.
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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.