Morningstar.com published an article yesterday that is perfect for today’s commentary on stocks hitting new 52-week highs and lows. Where to Invest When Nothing Looks Cheap examined the pockets of investing where investors might find reasonably priced investments.  

“‘Markets are expensive,’ says Charles Shriver, a portfolio manager at T. Rowe Price and co-chair of the firm’s Asset Allocation Committee. ‘We have more modest return expectations looking over the next 12 months,’” Morningstar contributor Sarah Hansen wrote. 

I couldn’t agree more with the above quote. 

I’ve held a significant amount of cash over the past few weeks, waiting for the steep price American consumers and companies will pay as a result of the White House’s implementation of global tariffs to reveal themselves. 

That’s yet to happen, but the day of reckoning will soon be upon us. Expect the economic numbers to get worse in Q4 2025 and Q1 2026. But I digress. 

Morningstar’s article pointed to four areas of relative opportunity in the markets: value stocks, international stocks, small-cap stocks, and high-yield bonds. Three of the four are part of the Avantis International Small Cap Value ETF’s (AVDV) investment strategy. 

The ETF just hit its 47th new 52-week high of the past 12 months. If you’re a passively-active investor, you might want to consider allocating some of your portfolio to AVDV for the next 3-5 years. Here’s why I feel this way. 

The ETF Itself

Before I get into the positives of investing in this particular ETF, let’s consider the basics of AVDV. 

Avantis launched the ETF in September 2019. It has $11.45 billion in total assets invested across 1413 holdings. Its annualized total return since inception through July 31 is 11.62%. The ETF’s benchmark, the MSCI World ex USA Small Cap Index, has a five-year annualized total return of 9.50% over the past five years through July 31. 

While it’s not quite the same comparison period, it’s pretty close. Over 200 basis points higher than its benchmark, it’s easy to see why it continues to hit new 52-week highs. 

Here’s what the ETF’s summary prospectus has to say about its investment strategy:

“The fund seeks to achieve higher expected returns by selecting securities of companies with higher profitability and value characteristics, as well as smaller market capitalizations relative to others within the fund's small cap investment universe. 

“To identify the desired market capitalization companies with higher profitability and value characteristics, the portfolio managers use reported and/or estimated company financials and market data including, but not limited to, shares outstanding, book value and its components, cash flows from operations, and accruals.”

From its summary prospectus, in addition to what you can observe from the above quote, the ETF won’t invest in a stock that has a market cap higher than the highest market cap in the benchmark. As of Sept. 24, 2024, it was $10.2 billion. 

As a result, AVDV’s average market cap is $1.96 billion, about one-quarter the size of the foreign small/mid value category average of $8.30 billion. You’re going to find micro-cap stocks among the 1413 holdings. 

Most importantly, the fund charges 0.36%, a very reasonable fee for an actively managed international ETF. 

Now let’s get into the fund’s holdings. 

Diversification Is the Key

Some ETFs claim to be diversified, but their top 10 holdings account for over 50% of the net assets. AVDV is not such a beast. Its top 10 accounts for just 8% of the ETF’s total assets. 

Here’s a blurb about its weighting methodology from the summary prospectus: 

“To determine the weight of a security within the portfolio, the portfolio managers use the market capitalization of the security relative to that of other eligible securities as a baseline, then overweight or underweight the security based on the characteristics described above [valuation and profitability metrics mentioned in summary prospectus and from earlier quote].”

Essentially, they add together the market caps of all 1413 stocks and then divide each market cap by the total to get an initial weighting. The portfolio managers then overweight or underweight each stock.

So, for example, if there were 100 stocks in an ETF’s portfolio with a total value of $200 billion, and one stock had a market cap of $4 billion, the initial weighting would be 2% [$4 billion divided by $200 billion]. The portfolio managers would then decide whether to make the final weighting higher or lower than 2%. 

That’s an illustrative example. In the case of AVDV, there are 1413 stocks; the weightings are all much smaller. For example, the top holding, Marks & Spencer Group (MAKSY), whose primary listing is on the London Stock Exchange, has a market cap of 7.28 billion British pounds ($9.81 billion). That’s at the high end of the inclusion eligibility.

Given the large number of holdings, the key to delivering above-average investor returns lies more with the sector and country weightings than with individual stocks. 

AVDV’s top three countries by weight are Japan (32%), the UK (12%), and Canada (10%). The top 10 countries account for 86% of the total assets, with 14% invested in 41 other countries. 

As for sectors, the top three are industrials (24%), materials (19%), and financials (18%). Technology is down at 4%. This weighting allocation is not uncommon for international small-cap funds. So, if you're looking for a significant tech contribution, AVDV probably isn’t for you. 

The Bottom Line

While AVDV is up 24% in the past year, its five-year return is just less than 78%, about 10 percentage points less than the S&P 500. Reversion to the mean suggests that the ETF could close the gap in the next five years. 

I just returned from a two-week trip in Ireland and Spain. Of the top 10 holdings, I engaged with two of them -- I went to Marks & Spencer in Belfast and saw Iveco Group (IVCGF) trucks everywhere I went in Spain -- so you will know a number of the names in the portfolio. However, with 44% of the total assets invested in Asia Pacific and 42% in Europe, American investors won’t know most of the holdings unless they spend a lot of time in either region. 

Don’t let that dissuade you. AVDV is the best deal going at the moment.   

On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.