AVUV: A Low-Cost Actively-Managed ETF for Small-Cap Value Investing

AVUV: A Low-Cost Actively-Managed ETF for Small-Cap Value Investing is a comprehensive analysis of the Avantis US Small Cap Value ETF (AVUV), a cost-effective actively-managed fund designed for small-cap value investing. Since its launch in September 2019, AVUV has showcased impressive performance, delivering double the returns compared to its passive counterparts like VIOV and IWN. The fund stands out with its proprietary approach to stock selection, focusing on small-cap stocks with high ratios of adjusted cash from operations to book value. However, the article also highlights some concerns regarding the fund’s allocation to volatile segments such as Regional Banks and Energy, as well as deteriorating fundamentals in terms of estimated sales and earnings growth. As a result, the author downgrades AVUV to a “hold” rating, signaling caution for potential investors.

Overview of AVUV

The Avantis US Small Cap Value ETF (AVUV) is a low-cost actively-managed small-cap value fund. It was launched in September 2019 and has quickly gained attention in the investment community. In this article, we will provide an overview of AVUV, its key features, performance, investment approach, and allocation strategy.

What is AVUV?

AVUV is an ETF that focuses on small-cap value stocks in the US market. Unlike passive funds that aim to track a specific index, AVUV takes an active approach to investing. The fund is managed by Avantis Investors, a firm known for its systematic investment strategies.

Key Features of AVUV

One of the key features of AVUV is its impressive performance since its launch. It has delivered double the return of passive peers like the Vanguard S&P Small-Cap 600 Value ETF (VIOV) and the iShares Russell 2000 Value ETF (IWN). This outperformance can be attributed to the fund’s unique stock selection method and allocation strategy.

Performance of AVUV

Comparison with Passive Peers

AVUV’s performance stands out when compared to passive funds in the small-cap value space. Since its launch in September 2019, AVUV has consistently outperformed its passive peers. Investors who have allocated their funds to AVUV have reaped the benefits of its active management approach.

Double the Return since Launch

The most impressive aspect of AVUV’s performance is its ability to generate double the return of passive peers. Investors who have held AVUV since its launch have seen significant gains. The fund’s active management and focus on small-cap value stocks have resulted in superior returns.

Investment Approach of AVUV

Proprietary Stock Selection Method

AVUV adopts a proprietary approach to selecting stocks for its portfolio. The fund aims to identify small-cap stocks that have high ratios of adjusted cash from operations to book value. This unique approach allows AVUV to identify companies with strong cash generation and attractive valuation metrics.

Focus on Small-Cap Stocks

AVUV focuses exclusively on small-cap stocks, which are companies with a relatively small market capitalization. This focused approach allows the fund to uncover opportunities that may be overlooked by larger investors. Small-cap stocks have the potential for significant growth, and AVUV aims to capitalize on these opportunities.

Adjusted Cash from Operations to Book Value Ratio

AVUV places a strong emphasis on the ratio of adjusted cash from operations to book value. This ratio provides insights into a company’s ability to generate cash and its valuation relative to its book value. By selecting stocks with high ratios in this regard, AVUV aims to identify undervalued companies with strong fundamentals.

Allocation Strategy

Regional Banks

AVUV allocates 16% of its portfolio to regional banks. This segment of the market can be volatile but also presents unique opportunities. Regional banks often have a strong presence in their local markets and can benefit from economic trends in their regions. AVUV’s allocation to regional banks allows investors to participate in the potential growth of these institutions.

Energy

Another segment that AVUV has allocated 16% of its portfolio to is energy. The energy sector is known for its cyclical nature and can experience significant price fluctuations. AVUV’s allocation to this segment reflects its belief in the long-term potential of energy companies. By carefully selecting energy stocks, AVUV aims to capture the upside potential while managing the inherent volatility.

Volatility in These Segments

It is important to note that both regional banks and the energy sector can be volatile. Investors should be aware of the inherent risks associated with these segments. AVUV’s allocation strategy aims to balance the potential for growth with the need for risk management.

Analysis of AVUV’s Fundamentals

Estimated Sales Growth

An analysis of AVUV’s fundamentals reveals some concerning trends. Estimated sales growth for the fund has been lower than expected. This indicates that the companies in AVUV’s portfolio may be facing challenges in growing their top-line revenue. It is crucial to closely monitor this aspect of AVUV’s performance to assess the long-term potential of its holdings.

Estimated Earnings Growth

Additionally, AVUV’s estimated earnings growth has been below expectations. This suggests that the companies in the fund’s portfolio may be struggling to translate their revenue growth into profitability. Investors should carefully evaluate the earnings potential of AVUV’s holdings to assess their ability to generate sustainable returns.

Deterioration in Fundamentals

Overall, AVUV’s fundamentals have shown signs of deterioration. The lower-than-expected sales and earnings growth raise concerns about the long-term viability of the companies in the fund’s portfolio. It is essential for investors to consider these factors when making investment decisions.

Author’s Downgrade

Reasons for Downgrade

Based on the analysis of AVUV’s fundamentals and the concerns highlighted, the author has decided to downgrade AVUV’s rating. The deterioration in AVUV’s fundamentals and the uncertainties surrounding its holdings’ growth potential have led to a reassessment of the fund’s prospects. It is important for investors to recognize the risks associated with AVUV and carefully evaluate their investment decisions.

Changing Recommendation to ‘Hold’

In light of the concerns raised, the author is changing the recommendation for AVUV to a ‘hold’. It is prudent for investors to reassess their investment thesis and carefully evaluate AVUV’s performance and future prospects. While AVUV has shown strong performance in the past, the current challenges facing its holdings necessitate a cautious approach. Investors should closely monitor AVUV’s performance before making any further investment decisions.

In conclusion, the Avantis US Small Cap Value ETF (AVUV) has quickly gained attention in the investment community due to its impressive performance and unique investment approach. However, recent analysis of AVUV’s fundamentals raises concerns about the long-term viability of its holdings. It is crucial for investors to carefully evaluate AVUV’s performance and reassess their investment decisions in light of these concerns.