Avantis Launches Small Cap International Stock ETF

Avantis Investors launched Thursday a small cap international stock ETF, hoping to capitalize on the increasing valuation spread between U.S. and international stocks. 

The Avantis International Small Cap Equity ETF (AVDS) is an actively managed exchange-traded fund that invests in small cap companies outside the U.S. It comes with an expense ratio of 0.30%.  

The firm specializes in active ETFs and manages $25 billion across 22 funds. AVDS, like Avantis’ other funds, is a systematic active ETF, meaning it is not tied to a particular index; it relies more heavily on quantitative rules rather than conventional stock picking. 

Over the past decade or more, large cap stocks have outperformed small cap stocks, and U.S. stocks have outperformed international markets. This is especially true this year, as the market rally has been disproportionately propelled by a handful of megacap companies.  

While it was originally believed that there was a return premium to investing in smaller companies, the size factor in the famous Fama-French three-factor model, more recent research has put this into serious doubt.  

“We don’t think there’s a theoretical underpinning for a size premium,” said Phil McInnis, chief investment strategist at Avantis. 

Small Caps, International Stocks Have Lagged Large Cap US Stocks 

However, Avantis is hoping other investing strategies may have more opportunities among small cap stocks, rather than due to any advantage of company size itself.  

“Factor returns are larger in small caps. You have some really attractive stocks and some really unattractive ones. Looking at small cap indexes, the small caps have been pulled down by these really bad performers,” said McInnis.

This is what the fund’s management is hoping to eliminate. It looks at multiple different value and profitability factors in the universe of international small cap stocks and cuts out roughly the bottom 20% performers on those metrics.  

This contrasts with the more focused effort of the Avantis International Small Cap Value ETF (AVDV), which, instead, focuses on the top 25% of small cap stocks according to the value metrics it looks at, meaning AVDS is significantly broader than its exposure. 

As for international stocks, McInnis said that the valuation spread between U.S. and international stocks has grown in recent years. This has been the case for a number of years now, and he acknowledges it can sometimes take a very long time for prices to reflect valuations. 

“I’m a believer in fundamentals. Prices can look different than fundamentals, but at some point they need to be reflective of them,” he noted. 

Contact Gabe Alpert at [email protected]