Avantis Launches 3 Small- and Mid-Cap ETFs

Avantis Investors has launched three new actively managed small- and mid-cap ETFs that give investors a way to diversify from the concentrated world of large caps. 

The new Avantis U.S. Mid Cap Equity ETF (AVMC) and Avantis U.S. Mid Cap Value ETF (AVMV) invest in mid-cap U.S. stocks. Mid-cap can be a nebulous category, with indexes varying wildly in their composition. 

Mitchell Firestein, senior portfolio manager at Avantis, said the rough universe the two exchange-traded funds look at are stocks too small for the S&P 500, but too large for the Russell 2000 Index. The Avantis Emerging Markets Small Cap Equity ETF (AVEE) invests in small-cap companies in emerging-market countries. 

Lagging Large Caps 

Emerging-markets and mid-cap stocks have underperformed large-cap stocks for years. The SPDR S&P Midcap 400 ETF Trust (MDY) and the iShares Core MSCI Emerging Markets ETF (IEMG) have returned 0.2% and 30% over the past five years, compared with the large-cap iShares Core S&P 500 ETF (IVV)’s 57% return.

Large-cap U.S. stock index ETFs, however, are heavily concentrated in just a handful of stocks. IVV’s top 10 holdings make up 31% of the fund, compared with 6.4% for MDY, according to etf.com data.  

“Every day we're hearing from various clients, advisors, especially the RIA space, but also institutional investors. They look around the landscape. They see there's less concentration in those mid-cap funds than in the large- and small- cap,” Firestein said in an interview, referring to registered investment advisor.  

AVMV May Be More Volatile 

Each of the three funds focuses on the valuation of stocks measured by metrics such as profitability and book value. AVMC overweights stocks that Avantis considers to be undervalued and underweights overvalued stocks, while AVMV invests only in the mid-cap stocks that Avantis deems to be the most undervalued.  

Firestein said the trade-off for investors is that AVMV may have a greater capacity to outperform in the long term, but may also be more volatile, which not all investors can tolerate. 

While large-cap stocks have been on a winning streak, there’s no reason to believe that the trend will be permanent, he said. 

“You have to look at companies’ valuations, and gravity tends to take hold at some point. If they are too richly valued, they’ll come back down to earth,” he said. 

Contact Gabe Alpert at [email protected]