Investors often debate the merits of active versus index (passive) ETFs, but they can get the best of both worlds with the Avantis US Equity ETF (NYSEARCA:AVUS).
I’m bullish on this $5.8 billion ETF because I like its differentiated strategy, which combines some of the benefits of index investing, like excellent diversification and a low expense ratio, with active management in an effort to generate enhanced results. Additionally, it has proven itself as a winner with a strong three-year track record.
What is the AVUS ETF’s Strategy?
According to fund sponsor Avantis, which is part of American Century, AVUS “invests in a broad set of U.S. companies across all market capitalizations and is designed to increase expected returns by overweighting securities we believe to be trading at lower valuations and with higher profitability ratios.”
AVUS does this by placing more emphasis on stocks that its portfolio managers expect will generate higher returns, with a skew towards stocks with smaller market caps, higher profitability, and cheaper valuations. It then underweights or excludes stocks that the portfolio’s management team expects to generate lower returns, including some stocks with larger market caps, lower profitability, and more expensive valuations.
AVUS “pursues the benefits associated with indexing (diversification, low turnover, transparency of exposures), but with the ability to add value by making investment decisions using information in current prices.”
Essentially, AVUS takes the time-tested strategy of index investing and sprinkles in a bit of active management to try to boost returns.
Supreme Diversification
AVUS holds 2,273 stocks, offering investors supreme diversification. Furthermore, its top 10 holdings account for just 20.0% of the fund, so it isn’t overly concentrated in just a few large holdings like some funds are.
Because AVUS holds 2,273 stocks, it gives investors exposure to a much broader set of securities than the typical S&P 500 (SPX) funds, which own the 503 stocks in the S&P 500.
Furthermore, its lower allocation to its top 10 holdings means that AVUS is more diversified and less concentrated than popular broad-market funds that invest in the S&P 500 like the Vanguard S&P 500 ETF (NYSEARCA:VOO) and the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). These two prominent ETFs allocate 30.8% and 31.9% of assets towards their top 10 holdings, respectively.
AVUS is also diversified in terms of the sectors that it invests in. Information technology is the fund’s largest weighting, at 21%, followed by financials at 16% and consumer discretionary at 13%.
Below is an overview of the AVUS ETF’s top 10 holdings using TipRanks’ holdings tool.
As you can see, AVUS owns many of the mega-cap stocks that have propelled the stock market higher in recent years, like the “magnificent seven” tech stocks. However, because it goes underweight on many large-cap stocks and stocks with more expensive valuations, it has smaller weightings towards these stocks than broad-market index funds like VOO, SPY, and others.
On the other hand, Lam Research (NASDAQ:LRCX) and Applied Materials (NASDAQ:AMAT) are good examples of stocks that AVUS overweights to its advantage.
Lam Research and Applied Materials are both companies that make equipment used in the semiconductor manufacturing process, and they have market capitalizations of $114.1 billion and $143.5 billion, respectively. Both rank within AVUS’ top 30 holdings, ahead of stocks with much larger market caps like UnitedHealth (NYSE:UNH) and Merck (NYSE:MRK), which feature market caps of $456.4 billion and $304.4 billion, respectively.
This selective weighting has worked out well for the fund, as Lam Research and Applied Materials are up 76.0% and 50.7% over the past year, while UnitedHealth and Merck are up 1.7% and 15.6%, respectively. For full transparency, these are just a few stocks that were cherrypicked, and there are likely examples where overweighting certain stocks didn’t work out as well, but overall, this gives a general idea of what AVUS is trying to do to add to its returns.
Lam Research and Applied Materials also boast strong Smart Scores of 10 and 8, respectively. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A score of 8 or above is equivalent to an Outperform rating.
As you can see, AVUS offers many of the benefits of an index fund, but by targeting stocks that it believes can generate better returns, it has the ability to generate additional upside. Obviously, this strategy can backfire, but so far, it has generated solid results, as we’ll discuss below.
Results Show That the Strategy is Working So Far
AVUS launched in September 2019, so it hasn’t been around long enough to compile a decades-long track record. But its results over the last few years are promising.
As of December 31, 2023, the fund generated a double-digit annualized return of 10.5% over a three-year period. This was slightly better than larger broad-market ETFs like VOO and SPY, which generated annualized returns of 10.0% and 9.9%, respectively, over the same time frame.
A Cost-Effective Expense Ratio
With an expense ratio of just 0.15%, AVUS is a cost-effective option for investors. An 0.15% expense ratio means an investor will pay just $15 in fees on a $10,000 investment annually. Assuming that the expense ratio remains 0.15% and the fund returns 5% per annum going forward, this investor initially allocating $10,000 into the fund would pay just $192 in fees over a 10-year time horizon.
A 0.15% expense ratio is a bit more than many broad-market index funds charge (for example, the aforementioned VOO and SPY charge 0.03% and 0.09%, respectively), but it is still very cheap in the grand scheme of things. Many active and passively-managed funds charge much more than this, with lesser results.
Is AVUS Stock a Buy, According to Analysts?
Turning to Wall Street, AVUS earns a Moderate Buy consensus rating based on 1,546 Buys, 654 Holds, and 74 Sell ratings assigned in the past three months. The average AVUS stock price target of $90.57 implies 9.4% upside potential.
The Best of Both Worlds
With a well-diversified portfolio, cost-effective expense ratio, and strong three-year total returns, AVUS is the type of ETF that investors can use as a building block for their portfolios. It gives investors many of the benefits of investing in broad-market index funds but adds in a dash of active management, which can produce a bit of upside over time. This makes it an appealing and differentiated ETF that investors can build their portfolios around.
