AVUV: A Small-Cap Value ETF Generating Big Returns

The Avantis U.S. Small Cap Value ETF (NYSEARCA:AVUV) is a unique, differentiated ETF utilizing small-cap stocks to generate big-time returns. 

I’m bullish on this $9.2 billion fund based on its differentiated strategy, which combines the benefits of index investing (such as a highly-diversified portfolio and low turnover) with elements of active management, its reasonable expense ratio, and the stellar returns it has generated over the past three years. 

What is the AVUV ETF’s Strategy?

According to the fund’s sponsor, Avantis (a subsidiary of American Century Investments), AVUV “invests in a broad set of U.S. small-cap companies and is designed to increase expected returns by focusing on firms trading at what we believe are low valuations with higher profitability ratios.” 

The fund offers many of the benefits of index investing, such as strong diversification and low turnover, but combines this “with the ability to add value by making investment decisions using information” on current prices. 

The fund utilizes “efficient portfolio management and trading process(es)” that are “designed to enhance returns while seeking to reduce unnecessary risks and costs for investors.”  

The fund’s managers seek to boost returns by overweighting stocks with higher profitability and value characteristics and those with smaller market caps versus other stocks in the fund’s investment universe. The fund’s managers define profitability mainly as “adjusted cash from operations to book value ratio” and value characteristics mainly as “adjusted book/price ratio.” So, how is this strategy playing out? It turns out it’s going pretty well, as we’ll discuss below. 

Excellent Three-Year Performance

AVUV’s strategy has translated into excellent returns over the past few years. As of December 31, 2023, AVUV generated an annualized three-year total return of 18.4%. This phenomenal return crushed its benchmark, the Russell 2000 Value Index, which returned 7.9% on an annualized basis over the same time frame, validating AVUV’s strategy.

These results also compare favorably to the S&P 500 (SPX). For example, the Vanguard S&P 500 ETF (NYSEARCA:VOO) returned an annualized 10.0% over the same three-year time frame. While it’s not a direct comparison, it’s interesting to note that AVUV’s results even beat those of the highly-touted Invesco QQQ Trust (NASDAQ:QQQ), which also returned an annualized 10.0% over this same three-year time horizon.      

AVUV has generated a 16.6% annualized return since its launch in 2019. The fund hasn’t been around for a long time yet, so it will be interesting to see if it can keep producing these types of results, but for now, AVUV looks like a clear winner. It has beaten its benchmark, the broader market, and even the most prominent Nasdaq 100 (NDX) ETF.   

A Diversified and Carefully Selected Portfolio

AVUV provides investors with great diversification, investing in 748 small-cap value stocks across a variety of sectors and industries.

Its top 10 holdings account for just a minuscule 8.7% of assets, meaning that there is negligible concentration risk here. In fact, top holding Boise Cascade Company (NYSE:BCC) has a weighting of just 1.0%, making it the only holding in the fund with a weighting of more than 1.0%. 

Below is an overview of AVUV’s top 10 holdings from TipRanks’ holdings tool. 

As you can see, most of the top holdings have market caps in the range of $4 billion to $5 billion. Many of the fund’s smaller holdings have market caps of below $1 billion. Because these are smaller stocks, many of the holdings aren’t household names with investors. However, many investors will likely be familiar with top 10 holdings like Abercrombie & Fitch (NYSE:ANF), Goodyear Tire & Rubber (NASDAQ:GT), and Ryder System (NYSE:R). 

As you can see from the chart, AVUV’s management team has done a good job of selecting and overweighting small-cap stocks that have performed well, helping drive the fund’s strong performance.

For example, Boise Cascade, a wood products and building materials company, has a yearly gain of 104.9%. Meanwhile, its second-largest holding, Alpha Metallurgical Resources (NYSE:AMR), a coal company, posted an even better gain of 136.8%. Lastly, clothing retailer Abercrombie & Fitch has gained a phenomenal 276.2% over the past year. 

The fact that AVUV harnessed these strong performances from a retailer and a coal company, stocks from two industries many investors have left for dead, shows that there is still plenty of room for stock picking and active management, and AVUV’s portfolio managers have done a great job of this. 

The fund is fairly diversified across sectors, with financials making up 28% of holdings, consumer discretionary accounting for 21%, and industrials weighing in at 17%. Energy has a 15% weighting. The Information technology sector has a lower rating of just 5%, which is perhaps unsurprising, as many tech stocks have larger market caps and often trade at higher valuation multiples. 

How Much Does It Cost to Own AVUV?

AVUV features a reasonable expense ratio of 0.25%. This means that an investor will pay $25 in fees on a $10,000 investment annually. If AVUV goes up 5% per year and the expense ratio remains 0.25%, this investor putting $10,000 into the fund will pay $319 in fees over a 10-year time span.  

Is AVUV Stock a Buy, According to Analysts?

Turning to Wall Street, AVUV earns a Moderate Buy consensus rating based on 396 Buys, 317 Holds, and 36 Sell ratings assigned in the past three months. The average AVUV stock price target of $95.73 implies 6.9% upside potential from current levels.

The Takeaway: AVUV Looks Like a Good Fit for Investors’ Portfolios

AVUV has used its unique strategy of investing in small-cap stocks and combining elements of both indexing and active management to generate superior returns for investors over the past three years, beating its benchmark, the broader market, and even the popular QQQ ETF in the process. I’m bullish on this ETF based on this differentiated strategy, strong three-year track record, and modest expense ratio. 

An additional positive about AVUV is that it pays a quarterly dividend and currently yields 1.7%. While this isn’t necessarily the most exciting dividend yield, it helps add to the fund’s total returns. 

Disclosure