Invested 12% of My Portfolio in a Loved ETF

As an investor with about 15 years of experience, I've predominantly invested in individual stocks. But a recent shift in my investment strategy saw me allocating approximately 12% of my wealth into an exchange-traded fund (ETF). This ETF provides exposure to a segment of the market that was glaringly missing from my portfolio and presents long-term investors with promising opportunities, especially considering current market conditions.

In light of the recent market sell-off, I purchased shares in Avantis U.S. Small Cap Value ETF (NYSEMKT: AVUV). While it would have been possible for me to research specific stocks within this sector, there were several reasons why choosing an ETF seemed more beneficial than relying on individual names.

Over the past decade or so, small-cap stocks have lost favor among investors. Particularly hard-hit are small-cap value stocks. Comparing returns over the last ten years for Russell 2000 Value Index and S&P 500 shows underperformance by small-cap value stocks against large-caps seven times out of ten calendar years.

This trend has led to a significant valuation gap between these two categories. Data compiled by American Century reveals at the end of 2023; small-cap traded at around 17% below their historical average forward price-to-earnings (P/E) ratio while large-caps traded about 15% above theirs. This wide valuation disparity hasn't been observed for decades and suggests greater upside potential for small caps than downside risk.

Historically speaking, over extended periods, small-cap value stocks tend to outperform other stock groups in investable markets despite not showing such performance lately due to various factors like increased risk premium resulting from Federal Reserve's interest rates policies aimed at countering inflation which pushes up both risk-free rate and consequently risk premium itself.

Researching large cap-stocks is relatively straightforward given abundant news coverage surrounding them as well as comprehensive Wall Street analyst notes available besides mandatory quarterly financial reports. In contrast, small-cap stocks typically receive less attention from news outlets and analysts making them interesting propositions for investors who can leverage this information asymmetry.

However, achieving such an edge would require intensive research and dedication of time that I prefer to invest in understanding large-cap companies better. This preference led me to choose the Avantis U.S Small Cap Value ETF which offers diversified exposure to small-cap value stocks without additional effort on my part beyond paying a modest fee.

The Avantis U.S Small Cap Value ETF is technically an actively managed fund with objectives aligning towards outperforming its benchmark index - Russell 2000 Value Index. The active management approach involves leveraging current valuations to overweight stocks likely yielding higher returns, primarily based on profitability-to-book-value metrics.

Despite generally avoiding actively managed funds due to their inability to consistently outperform fees charged, the relatively low expense ratio (0.25%) coupled with potential for superior performance against the benchmark index due largely to inefficiencies in trading of small caps made this particular ETF appealing.

Furthermore, compared with other similar ETFs like Vanguard Small-Cap Value ETF which only allocates about 33% assets in small-cap value stocks; Avantis provides significantly greater exposure at around 58%. Although it translates into slightly higher fees than what pure small-cap value index funds might charge; in my view, it's worth considering given its potential for delivering superior returns by virtue of its selection criteria as well as broader exposure offered within promising segment of market i.e., small cap values.

As always before investing significant amounts into any single investment vehicle including American Century ETF Trust - Avantis U.s. Small Cap Value ETF or others alike; do your homework thoroughly and consult professionals if needed because while some options may seem attractive today, they may not necessarily yield expected results tomorrow.