Avantis Emerging Markets Value ETF

AVES

Market cap $940M

Avantis Emerging Markets Value ETF offers diversified exposure to over 1,700 EM stocks, emphasizing value and profitability factors. AVES has outperformed EEM since inception with lower volatility, but recent 12-month returns lag EEM by 3 percentage points. The fund's portfolio is highly diversified but carries elevated geopolitical risk, with 46% in China and Taiwan.

Emerging markets equity returns have been driven by extreme mega-cap concentration, with index breadth collapsing to historic lows and masking weakness across much of the opportunity set. This concentration has distorted relative results for active managers, particularly those constrained by diversification rules or broad benchmarks, as small-cap underperformance and index construction limit flexibility.

I am skeptical about seeking growth in emerging markets due to backward-looking, market-cap-weighted ETFs that miss early-stage growth. Emerging markets carry excessive risks—political, policy, and valuation—that outweigh their growth prospects compared to US tech with secular tailwinds. Most emerging market ETFs compromise growth potential by focusing on large caps, failing to capture true growth opportunities in smaller companies.

As more and more investors look to diversify into international equities, it's worth asking: Which ETFs can provide the best solutions? While broader international equities funds have done well, much of that performance came amid the spring drop-off in U.S. stocks.

Emerging markets have been challenging for passive investors due to China's weakness, making a case for active management like AVES. AVES is an actively managed ETF launched in 2021 with promising results, focusing on undervalued stocks in emerging markets. AVES has a well-diversified portfolio with a focus on profitability and value, outperforming passive indices like EEM and offering exposure to emerging market potential.

Foreign investing presents significant benefits, but simple, passive strategies may not be cut out for it. A U.S. equities-focused passive strategy invests in some of the most closely scrutinized firms on Earth.

Avantis Emerging Markets Value ETF holds about 1500 stocks listed in emerging markets and showing value and profitability characteristics. AVES is well diversified across holdings and sectors, shows attractive valuation metrics, and has performed quite well relative to peers. However, investors willing to limit geopolitical and regulatory risks would likely prefer ETFs excluding China.

Emerging markets continued to expand at a solid pace midway into the first quarter of 2024, supported by broad-based expansion across both manufacturing and service sectors.

Overseas markets, particularly emerging markets, are expected to offer the best stock returns over the next decade. EM stocks trade at historically low valuations compared to the US and other international stocks.

With the expectation of Federal Reserve rate cuts to come this year, global central banks could also follow suit. This could pave the way for international equities to run higher, giving investors upside while also getting diversified exposure.