I was shopping an inventory of ETFs the opposite day, as you do, once I stumbled upon one thing I’ve been ready a really very long time for: a international small cap worth ETF.
Worth shares are the subset of dangerous shares which can be deemed ‘undervalued’ by traders.
In accordance with the worth thesis, these ugly ducklings are excessively shunned, decreasing their worth relative to their potential.
Therefore, you possibly can decide them up for a music, Moneyball type, and anticipate them to outperform the market over time as their true price is realised.
However the danger premium related to worth – the efficiency bonus doubtlessly out there past the market return – is overwhelmingly concentrated within the small cap nook of the inventory universe.
This implies you possibly can solely actually count on worth to repay while you put money into corporations which can be each smaller and cheaper on steadiness.
We are able to confirm this utilizing long-run knowledge going again to 1927. The report exhibits that long-only US small cap worth beat the US market by 2% per 12 months on common.
Worth works in different world markets too. I’ll publish some charts in a follow-up publish.
For now, I’ll simply remark that there’s no motive to assume the worth premium is lifeless, although it’s underperformed within the US since 2013.
The info additionally confirms that enormous cap worth doesn’t ship – no less than not within the long-only kind we will put money into.
Small bargains
Ideally then, to capitalise on the worth premium we’d put money into:
- A small cap worth fund
- That’s globally diversified
- With an investing method backed by credible unbiased analysis
- Together with strategies to mitigate the drawbacks of real-world worth methods
- That’s accessible to anybody for an affordable price
It’s all the time been inconceivable for UK DIY traders to tick all these bins – till now.
The Avantis International Small Cap Worth ETF (AVSG) checks all of them. A lot in order that I invested in it earlier than ending this overview!
Hopefully by the point your endurance runs out I’ll have defined why I’m so impressed.
What makes for a powerful small cap worth fund?
We wish a fund that:
- Captures measurement and worth traits as purely and persistently as doable, utilizing sound definitions of the components.
- Incorporates mechanisms corresponding to a profitability display screen to attempt to filter out undesirable worth shares.
- Combats type drift – that’s, the tendency for shares to maneuver out of the small cap worth a part of the spectrum as they rise in worth.
- Diversifies your general portfolio. (In case your chosen worth ETF is filled with Cisco Methods, Toyota, HSBC, and Shell, then it most likely overlaps considerably along with your international tracker fund, and so presents a diluted model of the issue.)
- Clearly articulates a clear funding course of for reliably doing all this.
- Retains prices down.
We must also have the ability to use extensively accepted valuation metrics to verify that the fund is doing its job.
The AVSG ETF delivers on all of these factors. I’ll present you ways with some knowledge in a sec.
What about monitor report?
Monitor report is the obtrusive omission from my standards above.
Aren’t returns necessary?
Sure, as soon as we’ve 5 years price of outcomes (and ideally far more) we will take a look at a fund in opposition to its direct opponents.
However AVSG solely launched in September 2024. Therefore there’s no option to pit it in opposition to rivals in a worthwhile apples-to-apples efficiency contest.
Furthermore, the UK’s Soviet-style grocery store of small worth funds means we’d be evaluating an apple with a turnip, one mouldy potato, and a suspicious-looking purple factor.
Fortunately although Avantis has been working within the US since 2019. The consensus from the critics has usually been a giant thumbs-up, and traders have rewarded the model by transferring billions into Avantis ETFs.
What’s extra, we will attempt to reassure ourselves that AVSG particularly gained’t show to be a lemon within the UK by checking how its US-domiciled equivalents have fared since their launch in September 2019.
That’s doable as a result of AVSG covers the identical territory as two US ETF stablemates:
- Avantis Worldwide Small Cap Worth (AVDV)
- Avantis US Small Cap Worth (AVUV)
Let’s match these two ETFs in opposition to their opponents utilizing the superb Portfolio Visualizer device to see how they’ve carried out.
Worldwide small cap worth face-off
Avantis’ most important rival on this class is Dimensional Fund Advisors (DFA):
It’s a lifeless warmth! The annualised nominal USD returns for the 2 funds over the longest comparable timeframe (October 2019 to finish of April 2025) have been:
- Avantis’ AVDV: 10.17%
- DFA’s DISVX: 10.25%
DFA has been the acknowledged grasp of the investible worth issue for the reason that early Nineties. Matching the DFA fund from launch is not any imply feat.
And whereas DFA funds can be found within the UK, that’s solely by way of monetary advisors.
This irritating scenario could also be altering – the agency is promoting for ETF roles in Europe. Beforehand DFA has made its funds out there to the broader American public in ETF kind, too.
However for now the DFA funds are no-go within the UK for those who’re going it alone.
US small cap worth face-off
Focusing particularly on the US, Avantis bossed a wider area of contenders on this class:
Once more these annualised returns hail from the longest time interval out there, October 2019 till finish of April 2025:
- Avantis’ AVUV: 11.1%
- DFA’s DFSVX: 10.0%
- Vanguard’s VBR: 8.3%
- iShares’ IJS: 5.3%
These outcomes, plus the merchandise’ underlying metrics and the evaluation of Avantis’ ETFs by famous US commentators corresponding to Allan Roth and Larry Swedroe – to not point out the well-informed Bogleheads neighborhood working a slide rule over them, too – dispels any concern I’ve about Avantis being an unknown amount.
The Avantis funds are doing a superb job within the US and I’ve no motive to assume they gained’t do the identical in Europe.
Is AVSG an excellent small cap worth ETF?
I consider AVSG is the true deal, and I believe we will independently confirm its small cap worth credentials utilizing knowledge aggregator Morningstar.
Morningstar supplies the one manner I do know of to match the issue exposures of funds out there to UK traders.
First, go to the Portfolio web page of AVSG’s Morningstar profile.
Then try the Inventory Model part:
The majority of AVSG is discovered within the small worth sq. of the grid.
Glorious!
That’s higher than DFA’s International Focused Worth fund:
You may see that DFA’s fund isn’t as small value-y as AVSG.
ZPRV, the SPDR MSCI USA Small Cap Worth ETF, does comprise extra small worth publicity:
Nevertheless it’s 100% US and therefore much less diversified. (You may pair ZPRV with ZPRX for the European dimension, however you’re nonetheless not protecting as a lot of the planet and with twice as a lot problem.)
Lastly, right here’s the iShares Edge MSCI World Worth Issue ETF (IWVL):
IWVL is globally diversified. However its inventory type reveals it to be a big worth ETF. Historic returns inform us we will’t count on massive worth to ship a major danger premium.
All instructed, I believe the Inventory Model survey exhibits that AVSG’s small worth chops are worthy of additional investigation.
AVSG’s elementary valuation metrics
I additionally wish to verify that AVSG scores nicely on a spread of generally accepted worth metrics.
Morningstar does the honours as soon as extra:
The decrease the scores within the inexperienced field, the extra value-y the fund is. And AVSG does nicely once more – outranking ZPRV and DFA’s fund, although I gained’t bother you with their screenshots.
Bear in mind, we’re not searching for absolute numbers or explicit thresholds. The metrics are helpful insofar as they permit us to evaluate AVSG versus comparable decisions.
Ignore the class and index numbers in the event that they’re inappropriate. On this case, Morningstar has served up off-point small / mid cap benchmarks, skipping the worth aspect of the coin.
Hit the Market Cap button within the Model Measures part to see the typical market cap of the fund’s holdings.
We wish this quantity to be teenier than thou to substantiate the fund’s small cap credentials:
| Fund | Av market cap ($bil) |
| AVSG | 2.09 |
| DFA Glb Targ Val | 5.37 |
| ZPRV | 4.07 |
As the image builds, AVSG appears bang on the small worth cash.
So we could name it a day?
Sadly the worth entice lies in wait.
Avoiding the worth entice
A worth entice is an funding that appears like an absolute cut price. It lights up the valuation metrics as a result of it’s low-cost.
Nevertheless it’s low-cost for a motive. The reason being it’s junk.
Good worth funds and indexes sieve the garbage with a profitability display screen.
We are able to get some sense of how nicely AVSG does this by way of the standard measure in Morningstar’s Issue Profile:
High quality is a variant of profitability. AVSG’s high quality rating is increased than DFA’s comparable fund, and DFA is well-respected for utilizing profitability screens to reinforce worth funds.
Ignore the truth that the standard rating appears objectively low and is under the class common.
You wouldn’t count on a small worth fund to attain extremely for high quality, and the class benchmark is off as beforehand talked about.
All I’m searching for is proof that AVSG’s shares aren’t scraped off the underside of the cut price bin. Its high quality rating of 77 (the 77th percentile for high quality in Morningstar’s inventory universe) presents some consolation on that entrance.
DFA’s fund lies within the eighty fifth decile for high quality. It holds even much less in the best way of worthwhile firms – but DFA’s worth funds set the usual for the trade.
Morningstar doesn’t rating ZPRV however IWVL (iShares’ massive worth effort) additionally floats across the eighty fifth decile. So compared to different worth funds, AVSG appears, nicely, high quality.
Unfavourable momentum
Momentum publicity can be price an eyeball.
Crew Avantis describes how worth funds may be adversely affected by adverse momentum. (Monevator articles also can undergo from this phenomenon.)
Image a inventory dropping in worth. This worth slashing can place a inventory firmly within the worth zone per conventional measures corresponding to worth/earnings, worth/ebook, and so forth.
However the chief perception of the momentum thesis is that inventory worth declines (and beneficial properties) sometimes proceed for a while.
Why rush into catching a falling knife when it’s most likely obtained additional to go? Higher to purchase it nearer to the underside after which hope to money in if and when it lastly ascends.
Avantis makes an attempt to harness momentum by delaying purchases with massive adverse six-month returns and, conversely, the sale of shares with massive six-month beneficial properties.
You’d count on a price automobile to attain fairly poorly for momentum. DFA’s fund is 84th decile.
However AVSG is sixtieth decile, which suggests it’s succeeding in dampening down adverse momentum.
The sunshine blue shading in AVSG’s Issue Profile above reveals every publicity’s historic vary. You may see its momentum rating is swingy.
However the lack of shade within the type and measurement classes exhibits the fund has remained firmly rooted in its goal components. It has not been by type drift since its launch.
Taken collectively, AVSG’s metrics counsel it’s a top-notch small worth ETF.
What on Earth are they as much as?
The Avantis staff has written a superb information to its methodology known as Our Scientific Strategy To Investing.
ETF suppliers not often write such a transparent clarification of their investing course of.
The main corporations pump out scanty advertising and marketing gloss that sometimes leaves me questioning in the event that they assume their prospects are idiots.
Or they produce indecipherable workouts in obfuscation, designed to make you assume you might be an fool.
Compared to these poles of buyer disservice, the Avantis paper is a masterclass in transparency.
Granted, they’re not telling you the place all of the our bodies lie. However they do clarify what they’re doing and why.
It is smart relative to my grasp of the tutorial literature, and you may observe the citations to sanity verify any facet of the technique.
I gained’t regurgitate the paper nevertheless it’s nicely price a learn for those who’re on this ETF. It bolstered my sense that AVSG is an efficient alternative for a world small cap worth fund.
(To not point out the one one!)
Closing remarks on AVSG
Avantis is a sub-brand of worldwide asset supervisor, American Century. American Century seems to be fairly well-regarded, whereas Avantis was spun-up by ex-DFA executives – little question explaining the spectacular worth fund execution.
AVSG’s 0.39% OCF is just not low-cost, nevertheless it’s not costly for what it’s both. I wouldn’t assume twice about that price ticket if I needed small worth publicity.
It’s an actively-managed ETF so it doesn’t monitor an index. That’s how DFA funds work too, and it seems to be a bonus on this class.
The ‘international’ moniker means developed world actually. Rising markets are excluded.
Nonetheless, AVSG is abundantly diversified with 1,300 shares. Take a look at the holdings and also you’ll shortly see there’s no hazard right here of replicating your international tracker positions.
Scan the sectors and also you’ll additionally see helpful variations. For instance, AVSG is simply 5% tech versus 25% in Vanguard’s Developed World ETF (VEVE).
The Avantis fund gained’t cut back your US publicity – however it might assist if AI-driven massive caps falter.
Diversifying your sources of return like this paid off handsomely when tech shares imploded in the course of the Dotcom bust. The S&P 500 dived -38% in these years. In the meantime US small cap worth superior 19%.
Nonetheless, who is aware of whether or not that can occur once more? Or if small worth will outpace the broader market sooner or later?
Furthermore AVSG is liable to provide you a tough trip alongside the best way. Take a look at the volatility measure above.
Certainly the explanation small worth is predicted to earn market-beating returns is as a result of it masses up on very dangerous shares. Thus AVSG is just not for the faint-hearted or anybody who doesn’t know the way they react to inventory market reversals.
Execs
- Glorious instance of a small cap worth fund
- The one globally-diversified iteration out there to UK traders with out leaping by DFA hoops
- Metrics look good
- Effectively conceived and clearly documented funding course of
Cons
- There’s no assure small cap worth will outperform the market. In reality it hasn’t for over a decade.
- It’s dangerous!
Take it regular,
The Accumulator
