The Avantis International Equity ETF (NYSEARCA:AVDE) invests across a diversified basket of foreign stocks from developed markets.
The attraction here is an actively managed strategy where the investment team has the flexibility to shift allocations in an effort to enhance returns. Impressively, AVDE has outperformed benchmarks and comparable ETFs since the fund inception date in 2019 with an overall solid record.
We view AVDE as a good option for investors as a core portfolio holding to capture strategic long-term exposure to this important market segment. In the context of the current market environment, we expect AVDE to continue benefiting from several macro tailwinds with further upside in the year ahead.
What is the AVDE ETF?
AVDE is managed by Avantis Investors, which is a subsidiary of “American Century Investments”, a well-recognized institutional asset manager. The fund seeks long-term capital appreciation through a relatively broad mandate to invest in non-U.S. companies across countries, market sectors, and industry groups.
While AVDE is actively managed, meaning the fund is not intended to track any particular index, the strategy here is relatively subtle with a focus on diversification and balanced risk through 3,284 current holdings.
The fund prospectus explains an effort to overweight companies that the investment team expects can deliver higher returns while underweighting those with less favorable fundamentals.
AVDE Portfolio
The “International Equity” component of the fund name refers to the specific focus on developed economies that stand out as having higher levels of income on average with a more mature legal system and credible regulatory framework.
The idea here is that companies from developed countries in Europe, Australia, Canada, and Japan should be at lower risk compared to emerging markets in the context of the political backdrop. This is important when thinking about more recent volatility in regions like Asia-Pacific or Latin America that have underperformed in recent years, despite a higher growth potential.
Currently, stocks from Japan represent about 22% of the AVDE portfolio, followed by the United Kingdom at 13%, and Canada at 10%
Going through the current portfolio, international mega-caps compose the top holdings with Denmark-based pharmaceutical giant Novo Nordisk A/S (NVO) as the largest position with a 1.7% weighting. ASML Holding N.V. (ASML) from the Netherlands represents 1.1% of the fund, followed by Shell plc (SHEL) at 0.9%.
Given the size of the portfolio and number of companies, what’s important here is less the company-specific contributions to the fund performance, but more so the high-level macro trends and sector themes.
On this point, going back to that term we used in describing AVDE’s actively-managed strategy as “subtle”, we find that the exposures here are at least similar to the “MSCI World EX US IMI Index” which the fund uses as its official performance benchmark. Simply put, it appears AVDE modestly tilts the weightings to achieve its investment strategy goals.
Here we can contrast AVDE to the alternative passively-managed iShares Core MSCI International Developed Markets ETF (IDEV) which is designed to closely track the same “MSCI World ex US IMI Index”.
What we find is that while there is a significant overlap in terms of top holdings, there are also some important differences. AVDE holds a larger number of stocks, marginally capturing more small-cap exposure down the portfolio, while the sector breakdown is overweight in some sectors and underweight in others.
For example, AVDE’s 20.3% weighting in the Financial sector is above the 18.9% position in IDEV. On the other hand, AVDE’s 5.9% weighting in Consumer Defensive stocks is below the 8.1% position of the sector within IDEV.
Similar dynamics can be observed with the Vanguard FTSE Developed Markets Index ETF (VEA), which tracks the separate “FTSE Developed All Cap ex US Index”.
AVDE Performance
Our interpretation is that these types of spreads, also seen at the country allocation level, explain AVDE’s modest category outperformance in recent years against these benchmarks. Over the last three years, AVDE has returned 10.0%, compared to 8.5% from IDEV and 7.2% from VEA.
This period captures not only the global post-pandemic market selloff through 2022 but also the stronger rebound since 2023. It appears that the Avantis team has been capable of generating excess returns through its process of security selection and efficient portfolio management.
We believe this record helps to justify AVDE’s 0.23% expense ratio, higher in comparison to VEA at 0.05% or IDEV at 0.04%. The other point here is that these three funds all feature a dividend yield of around 3%, while AVDE’s payout is distributed semi-annually.
Investors should also understand the strategy limitations. We specifically contrasted AVDE with funds like VEA and IDEV as a good reference point for what Avantis does well, but keep in mind that there are also alternative developed market strategies that can also be attractive for different reasons.
We can bring up the Invesco S&P International Developed Momentum ETF (IDMO) which targets stocks with the momentum factor being the quantitative strategy to systematically target individual stocks that have performed well in recent periods. There is also the Invesco S&P International Developed Market Quality ETF (IDHQ), which screens for companies with strong fundamentals.
Notably, both of these factor ETFs have outperformed AVDE historically, which highlights the difficulty in objectively proclaiming one fund or strategy is always better than another.
Investors who only hold U.S. stocks can benefit from adding exposure to international equities but should also consider the importance of emerging markets (EMs). In this case, while funds like the iShares MSCI Emerging Markets ETF (EEM) have lagged in recent years, it is possible EMs could lead higher in the future where that uncertainty can only be overcome by keeping a diversified position.
Final Thoughts
There’s a lot to like about the Avantis International Equity ETF which does a very good job within its ETF category. Our expectation is for AVDE and developed market equities overall to continue performing well amid an environment of resilient economic conditions globally, with cooling inflationary pressures and stabilizing interest rates helping to support risk sentiment.
Technically, the fund remains below its all-time high reached back in 2021 near $66.00 per share, approximately 10% higher than the current level, which we believe becomes the natural upside target from here.
In terms of risk, economic indicators from key developed market economies are a monitoring point as well as trends in the U.S. Dollar which can introduce some FX risk to the fund against the companies that generate the majority of their business in foreign currencies. Outside of a major deterioration to the macro backdrop, we see AVDE reclaiming those highs sooner rather than later.
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