On this episode of the “ETF of the Week” podcast, VettaFi’s Head of Research, Todd Rosenbluth, discussed the Avantis U.S. Small Cap Equity ETF (AVSC ) with Chuck Jaffe of Money Life. The pair discussed several topics related to the ETF, in order to give investors a deeper understanding of it.Chuck Jaffe: One fund, on point for today. The expert to talk about it. Welcome to the ETF of the Week!
Yes, this is the ETF of the Week, where we examine trending, timely, new, newsworthy, unique, and intriguing exchange-traded funds. And we do that with Todd Rosenbluth. He’s the head of research at VettaFi, and at ETFDb.com — which is a sister site to VettaFi — you’ll find all the tools and research that you need to investigate the funds we talk about and to make yourself a savvier, smarter investor in ETFs.
Todd Rosenbluth, great to chat with you again.
Todd Rosenbluth: It’s great to be back, Chuck.
Chuck Jaffe: Your ETF of the Week is…
Todd Rosenbluth: The Avantis U.S. Small Cap Equity ETF, AVSC.
Chuck Jaffe: AVSC, the Avantis U.S. Small Cap Equity ETF. We’ve done a sister fund as ETF of the Week. Small-cap equity? Well, small-cap has been driving things a little bit for the market as we’ve seen some sector rotation. Is this about that sector rotation and what you expect in the small-cap rally?
Todd Rosenbluth: So there’s a few things that caught my eye with this fund. One, this is an actively managed small-cap ETF that’s relatively cheap. You and I, last time, talked about how important fees are for other people besides me, and so I wanted to bring a low-cost, actively managed ETF.
You’re right. Avantis, which is part of American Century, has had a lot of success adding new products and bringing those products to marketplace with success.
And we’ve seen this product from Avantis, their Small Cap Equity ETF, cross the $3 billion mark. This is a good time for small-cap strategies. This is a good time for a fund that is outperforming the Russell 2000 this year and in the past. Worth highlighting.
Chuck Jaffe: Yeah, I mean, this fund is up more than 25% this year. The category, small-caps generally, about 22%. So it certainly has been killing it, and it’s above average. You mentioned Avantis is basically a sister company to American Century.
It’s a little bit about how they do things: What comes under the American Century label is all about, “Here’s who our stock pickers are,” and Avantis is really more about, “Here’s our methodology,” right?
Todd Rosenbluth: You’re correct. So there are American Century-branded equity strategies that are more bottom-up stock picking, a more concentrated approach to investing, whereas the Avantis-branded products are a bit more quantitative in nature. So there’s a screening process that’s used for all of the underlying strategies that focus on profitability, so high-quality companies; it looks for undervalued companies within a given space.
And then size is part of the factor, regardless of the overall strategy. So this is a small-cap equity strategy. So within that universe of stocks that you might find in the Russell 2000 or something similar, this Avantis fund owns roughly 1,500 of those stocks. So modest exposure to each individual stock, but done on a bottom-up basis on a quantitative metric.
People might think that it’s benchmark-like, and it is in its broad diversification, but when I look at the sector exposure, I see an overweight towards financials, an overweight towards consumer discretionary, and an underweight towards information technology stocks. So this is not a closet benchmark product. This is an actively managed fund that’s had a lot of success.
Chuck Jaffe: Yeah, and that explains some of the outperformance this year as well. If you’re gravitating towards financials, small-cap financials have been killing it. And you’re gravitating away from some of the information technology, which is some of the stuff that’s been hurt, and the small-cap companies haven’t had the big bump that a lot of the big tech firms have that have been in the right tech spaces.
So that explains a lot. But also, if you’ve got 1,500 roughly of the Russell 2000, while it seems like you’ve got most of it, those differences are pretty significant in terms of how smooth the ride might be, et cetera. Because again, what you’re looking at is the 1,500 companies that meet their metric.
Todd Rosenbluth: You’re right. And so the metric is what matters here, and then how the individual stocks might be over- or underweighted based on those characteristics. And one of those key metrics that I highlighted was profitability. And I think it’s worth drilling down a little bit more on that. The Russell 2000, which is the common benchmark for many people to use either to invest in or as a reference point in this small-cap space, has a lot of stocks that are unprofitable.
Unprofitable companies or less profitable companies can go up when the market is raring higher. But when there is some volatility in the marketplace, or the environment we’re in today where quality is mattering more, a strategy like Avantis can fit in nicely into that, because of that quality filter that’s being used on an active basis.
Chuck Jaffe: It is a small-cap fund. There are going to be a lot of members of our audience who — they’ve got small-cap. So, do they only add this if it’s diversified? Like, how does this pair with other things, and what’s the role in a portfolio?
Todd Rosenbluth: So, we find that many people are underexposed to small-cap strategies because for years the large-caps have been outperforming. Not this year, but for many years those large-cap stocks had been outperforming. So even if you owned a small-cap strategy within a portfolio, unless you recently looked at your asset allocation, you’re less exposed than you might otherwise be.
And so this could be an opportunity. If what you own is an index-based approach, this can be a nice complement to that without taking on too much benchmark risk and without costing a lot. You might have gotten me there, but this fund only costs 25 basis points, so this is a reasonable price for active management across many different approaches.
And if you don’t have exposure — it’s worth taking a look at. And what you might also have is an active mutual fund. So you believe in active management. That’s what this is. This is active management, but in a low-cost, more tax-efficient manner than perhaps your traditional mutual fund.
Chuck Jaffe: It’s not fully index-based. It’s not like, “Oh, we’re going to do smart beta.” But the turnover is very low. Like, that was one of the things that stood out to me when I looked at this fund when you told me it was going to be the ETF of the Week: I’m like, it’s got like 5% turnover!
So, it’s actively managed, but at 5% turnover, it’s not very actively managed!
Todd Rosenbluth: You’re right. I mean, so this is a low-turnover approach. The active part that I see is how different it is from the benchmark at the sector level, that we touched on earlier, and that it actually is a little bit smaller than the benchmark. So I’m looking at the weighted average market cap of $3 billion versus $4.2 billion, according to the Avantis fact sheet.
So you’re right: You are not churning the portfolio. I think that’s a good thing. And yes, I intentionally used the word “churning” because too much turnover can be harmful to a portfolio.
What it’s doing, because there are over 1,500 stocks, there are adjustments. Stocks will move in, stocks will move out. But mostly, they are picking high-quality stocks, and then those are still high-quality companies a quarter later because of that profitability characteristic. I would note that with the Russell 2000, even though there are changes, those changes are because companies actually have jumped up.
They’ve appreciated in value, as opposed to what you might find. So the turnover, I think, is probably higher for the Russell 2000 index-based products, but not necessarily for the right reasons, is that stocks no longer are the 2,000 smallest companies. They either have dropped too far or they’ve climbed too high, and now there’s a new screen being done periodically.
Chuck Jaffe: Well, yeah. And I didn’t mean for my question to sort of make you a little bit defensive there. It was more that they are active, but their activity is actually disciplined. It’s: “We only buy it if it passes our metric. Once we’ve got it, we’re going to get rid of it if it no longer passes our metric, and we’re not going to do much else.”
So it is active management. It is certainly active stock picking, but it’s not what most people think of when it comes to active management, which is, “Oh, we’re tweaking the portfolio and getting rid of this and doing that,” because as long as something holds their metric, it’s there.
Todd Rosenbluth: That’s fair. And so you’re right, this is active management. But this is active management different than what people might be familiar with from a bottom-up, stock-picking, more concentrated portfolio where you’re moving in and out of your winners or paring back losers much faster.
Chuck Jaffe: It’s a really interesting pick, especially because small-caps have been doing really well, and you might want to be adding to your small-cap holdings. It’s AVSC, the Avantis U.S. Small Cap Equity ETF, the ETF of the Week from Todd Rosenbluth at VettaFi. Todd, great stuff. We’ll see you again next week.
Todd Rosenbluth: Thanks a lot, Chuck.
Chuck Jaffe: The ETF of the Week is a joint production of VettaFi and Money Life with Chuck Jaffe. And yes, I’m Chuck Jaffe! You can learn all about my hour-long weekday podcast by going to MoneyLifeShow.com, or you can search for it wherever you find great podcasts.
Now, if you’re searching for great information on exchange-traded funds, VettaFi’s sister site, ETFDb.com, has everything you need to look at the funds we talk about, the ones that are in your portfolio, or anything that you’re considering, and get yourself more details and more information. You can find ETFBb on X at @ETFBb, and Todd Rosenbluth, VettaFi’s head of research, my guest, he’s on X as well; he’s at @ToddRosenbluth.
The ETF of the Week is here for you every Thursday. Follow us on your favorite podcast app to make sure you don’t miss an episode, and we’ll introduce you to another great ETF next week. Until then, happy investing, everybody!
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Note: This article was created in part through assistance from AI tools. The content has been thoroughly reviewed and edited by the author.
