Investors often debate the merits of active vs. index (passive) ETFs, but with the Avantis US Equity ETF you get the best of both worlds (NYSEARCA:AVUS).
I'm bullish on this $5.8 billion ETF because it combines some of the benefits of index investing, such as superior diversification and lower expense ratios, with active management to generate higher results. Because I like the structured strategy. Plus, with a strong three-year track record, we've proven to be a winner.
What is the strategy of AVUS ETF?
According to fund sponsor Avantis, a member of American Century, AVUS “invests in a broad range of U.S. companies across all market capitalizations, and invests in securities that we believe are trading at lower valuations and higher yields. “It is designed to increase expected returns by overvaluing it.” ”
AVUS accomplishes this by giving more weight to stocks that portfolio managers expect to generate higher returns, and by favoring stocks with smaller market caps, higher profitability, and lower valuations. We then underweight or eliminate stocks that the portfolio management team expects will yield lower returns, such as some stocks with larger market capitalizations, lower profitability, and higher valuations.
AVUS “seeks the benefits associated with indexing (diversification, low turnover, exposure transparency) but adds value by using current price information to make investment decisions. It also has functions.”
Fundamentally, AVUS takes a proven index investing strategy and sprinkles in a little active management to improve returns.
best diversification
AVUS has 2,273 shares, offering investors the highest diversification. Additionally, the top 10 holdings represent only 20.0% of the fund, so it is not overly concentrated in a few large holdings like some funds.
AVUS holds 2,273 stocks, giving investors exposure to a much broader set of securities than the typical S&P 500 (SPX) fund, which owns 503 stocks in the S&P 500).
Additionally, the smaller allocation to the top 10 stocks means that AVUS is more diversified and less concentrated than a typical broad market fund that invests in the S&P 500, such as the Vanguard S&P 500 ETF. means (NYSEARCA:VOO) and SPDR S&P 500 ETF Trust (NYSEARCA:Spy). These two prominent ETFs allocate 30.8% and 31.9% of their assets to the top 10 stocks, respectively.
AVUS is also diversified in terms of investment areas. Information technology has the largest weight in the fund at 21%, followed by finance at 16% and consumer freedom at 13%.
Below is a summary of the AVUS ETF's top 10 holdings using TipRanks' holdings tool.
As you can see, AVUS owns many of the megacap stocks that have boosted the stock market in recent years, including the “Magnificent 7” tech stocks. However, because it is underweight in many large-cap stocks and stocks with high valuations, these stocks are underweighted compared to broader market index funds such as VOO or SPY.
On the other hand, Lam Research (NASDAQ:LRCX) and Applied Materials (NASDAQ:AMAT) is a great example of a stock that is overweight in favor of AVUS.
Lam Research and Applied Materials, both companies that make equipment used in semiconductor manufacturing processes, have market capitalizations of $114.1 billion and $143.5 billion, respectively. Both rank within AVUS's top 30 holdings, outperforming stocks with much larger market caps like UnitedHealth (New York Stock Exchange:UNH) and Merck (New York Stock Exchange:MRK), with market capitalizations of $456.4 billion and $304.4 billion, respectively.
This selective weighting has worked well for the fund, with Lam Research and Applied Materials up 76.0% and 50.7% over the past year, and UnitedHealth and Merck up 1.7% and 15.6%, respectively. To ensure full transparency, these are just a few handpicked stocks, and there are probably instances where overweighting a particular stock didn't work out for you, but overall, this is a great way for AVUS to increase profits. Gives a general idea of what you're trying to do. Return value.
Lam Research and Applied Materials also boast high Smart scores of 10 and 8, respectively. Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score of 1 to 10 based on eight key market factors. A score of 8 or higher corresponds to an outperform rating.
As you can see, AVUS offers many of the benefits of an index fund, but you can create even more upside by targeting stocks that you think can generate better returns. Obviously, this strategy can backfire, but it has so far produced solid results, as explained below.
Results show that the strategy is working so far
AVUS was launched in September 2019, so it hasn't been around long enough to compile decades of experience. But its results over the past few years have been promising.
As of December 31, 2023, the fund had generated a double-digit annualized return of 10.5% over three years. This was slightly better than large broad market ETFs like his VOO and SPY, which produced annualized returns of 10.0% and 9.9%, respectively, over the same period.
Cost-effective expense ratio
With an expense ratio of just 0.15%, AVUS is a cost-effective option for investors. A 0.15% expense ratio means investors pay only $15 in fees on a $10,000 investment annually. Assuming that his expense ratio remains at 0.15% and the fund's return continues to be 5% per year going forward, this investor who initially allocated $10,000 to the fund will earn him $192 in fees over 10 years. You just have to pay the dollar amount.
The 0.15% expense ratio is a bit higher than the fees of many broad market index funds (for example, the aforementioned VOO and SPY fees are 0.03% and 0.09%, respectively), but it's still very cheap overall. is. Many actively and passively managed funds charge much higher amounts than this, but the results are lower.
Is AVUS stock a buy, according to analysts?
Turning to Wall Street, AVUS has a Moderate Buy consensus rating, based on 1,546 Buys, 654 Holds, and 74 Sell ratings assigned over the past three months. Masu. AVUS's average price target of $90.57 implies an upside potential of 9.4%.
best of both worlds
With a well-diversified portfolio, cost-effective expense ratio, and strong three-year total return, AVUS is the type of ETF that investors can use as a component of their portfolio. This allows investors to get many of the benefits of investing in a broad market index fund, but with the addition of active management, which can result in modest gains over time. This makes it an attractive and differentiated ETF for investors to build a portfolio around.
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