By Dr. Jim Dahle, WCI Founder[AUTHOR'S NOTE: After reading this post, Katie said I should put a disclaimer on the top of it that we're really going to get into the weeds today and if you're looking for basic investing information, this is a post you should skip.]
I received an email the other day:
“I was wondering your opinion on Avantis funds compared to Vanguard index funds. I primarily use Vanguard index funds and a sprinkling of PRIMECAP funds. But I was recently listening to Paul Merriman, and he seems to be a fan of Avantis funds and using factor-based investing.
I was comparing (using PortfolioVisualizer) two portfolios. One portfolio with Vanguard index funds (VOO – 60%; VBR – 20%; VXUS – 20%) compared to [Avantis] (AVUS – 60%; AVUV – 20%; AVDE – 20%). This is close to an apples to apples portfolio using Vanguard ETFs and comparable Avantis ETFs. The returns over the longest period of time where data was available have the Avantis portfolio ahead by decent amount. Yes, the Avantis funds have a higher expense ratio, but it is not very high for an actively managed fund. For example, AVUS has ER of 0.15%. The one issue is the data only goes back to January 2020, as that is how far back data for AVUS goes. This analysis is for January 2020-June 2023 due to data constraints.
Just wondering your thoughts on this and with Avantis funds for a portion of the portfolio—for example, the small cap value and international portion of a portfolio. These asset classes are where I saw a larger difference in returns with Avantis funds compared to Vanguard.”
Avantis = DFA ETFs
The best way for those who have been around a long time to think about Avantis is “DFA ETFs.” You can learn more about Dimensional Fund Advisors LP (DFA) in a similar post I did way back in 2013 (DFA vs. Vanguard). For those who have not been around for a long time, DFA is a for-profit mutual fund company that attempted to enhance the concept of an index fund with various improvements. It was a huge believer in the tilting of a portfolio toward the small and value factors (and now the profitability factor). This controversial topic (along with specific discussions about DFA and its funds) used to be commonplace on the Bogleheads forum. However, given the underperformance of small and value over the last 15 years or so and the fact that DFA failed to get into the ETF game when it should have has led to much less discussion.
Apparently, some of the people at DFA were not happy that DFA stuck to its original plan of traditional mutual funds distributed via specifically educated advisors, so they left and started Avantis. Consider the principals.
CIO Eduardo Repetto, PhD: Prior to Avantis Investors' establishment in 2019, Eduardo was co-chief executive officer, co-chief investment officer, and director at DFA until 2017. While at DFA, Eduardo provided oversight across the investment, client service, marketing, and operational functions of DFA. He also oversaw its day-to-day operations and directed the engineering and execution of investment portfolios, and he was involved in the design, development, and delivery of research that informed the firm's investment approach as well as its application through portfolio management and trading.
COO Pat Keating, CFA, CPA: Prior to Avantis Investors' establishment in 2019, Pat served as chief operating officer at DFA, including all of their subsidiary companies globally, from 2003-2017. Pat oversaw DFA’s day-to-day business and managed growth plans and capital investment.
Chief Investment Strategist Phil McInnis: Prior to Avantis Investors' establishment in 2019, Phil was a vice president and head of portfolio solutions at DFA in Austin, where he oversaw a team charged with developing content to explain Dimensional's investment approach and helping clients on topics related to asset allocation, manager evaluation, and risk budgeting.
Senior Portfolio Manager Daniel Ong, CFA: Daniel served as a senior portfolio manager and vice president at DFA for 14 years. His responsibilities included managing international developed and emerging markets equity strategies, leading the emerging markets equity desk, and engaging with clients.
Senior Portfolio Manager Ted Randall: Prior to Avantis Investors' establishment in 2019, Ted served as vice president and portfolio manager for domestic and international equity strategies at DFA. In this role, Ted served as portfolio manager and portfolio advocate for 11 US and non-US developed, emerging market, and blended asset allocation mutual funds and separately managed accounts.
I could go on, but that is five of the first seven on the “Our Team” page on the website. It's the DFA folks, but now they have left DFA and are working with American Century to use those same principles to do low-cost, index-like ETFs.
In response, DFA converted six of its funds to ETFs in 2020 (the first Avantis funds opened in 2019). It now has 2-3 dozen of its own. Maybe the DFA marketing folks went to Avantis too because I wasn't aware of this until after I had actually written the first draft of this article. The DFA track record looks longer than the Avantis one, because DFA converted its funds to ETFs. Maybe a future article will be on DFA vs. Avantis, because there are some slight differences in the factors they use.
The Advantage of ETFs
Avantis (ETFs) has three big advantages over DFA (funds). The first is that these ETFs are available more broadly than DFA funds ever were. You can buy them in any brokerage or IRA account, commission-free at the main places like Vanguard, Schwab, and Fidelity. If your 401(k) has a brokerage window option, you can even buy them there.
Second, ETFs are generally more tax-efficient than traditional mutual funds, EXCEPT for those mutual funds at Vanguard that are paired with an ETF share class. If you're investing in a taxable account, this is a significant advantage of Avantis over DFA, although it's not really any particular advantage over Vanguard.
Finally, for the most part, you could not use DFA funds unless you hired a financial advisor to manage your money. And the typical fee for these “DFA advisors” was 1% of assets under management (AUM). Any comparison always had to take into account that 1% cost. When I ran the numbers, I never concluded that it was worth it to pay 1% JUST to get DFA funds. However, I figured if someone was going to use an advisor, they ought to get one who can use the DFA funds, particularly if they believed in the small and value factors.
But I was fine using DFA funds in the Utah 529 where I did not have to pay that price. I've actually been running a “natural experiment” there for many years as 25% of my kids' 529s is invested in the Vanguard Small Value fund and 25% is invested in the DFA Small Value fund. This experiment has been running since January 2014, and DFA is currently ahead (as of July 2023) 9.05% to 7.47% per year. Vanguard has actually won six of the nine years, though. Basically, the DFA fund is smaller and more value-y than the Vanguard fund, so when small and value do well, DFA does better. When they don't, Vanguard does better.
More information here:
Which Small Cap Value Funds Are Best for You?
What Exactly Does Avantis Do Differently?
So what exactly is Avantis (and, prior to that, DFA) doing differently from Vanguard? Well, it's a little hard to tell exactly. When you look at the brochure, it says things like this:
“#1 Financial Science Lays the Foundation Our investment process is based on an academically supported, market-tested framework that aims to identify securities with higher expected returns based on their current market prices and other company financial information.”
I don't know what that means, but it sounds like active management and a lot of backtesting. Not so sure I want THAT based on the data for active managers. But they might just be saying they tilt to small and value. You can get more information from the prospectus of the funds. While there is a heavy emphasis on the size, value, and profitability factors, it is clear that this is active management. Here's what the prospectuses for the small value funds say:
“The fund seeks securities of companies that it expects to have higher returns by placing an enhanced emphasis on securities of companies with smaller market capitalizations and securities of companies with higher profitability and value characteristics. Conversely, the fund seeks to underweight or exclude securities it expects to have lower returns, such as securities of larger companies with lower levels of profitability and less attractive value characteristics. To identify small 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. The portfolio managers define ‘value characteristics' mainly as adjusted book/price ratio (though other price to fundamental ratios may be considered). The portfolio managers define ‘profitability' mainly as adjusted cash from operations to book value ratio (though other ratios may be considered). The portfolio managers may also consider other factors when selecting a security, including industry classification, the past performance of the security relative to other securities, its liquidity, its float, and tax, governance or cost considerations, among others.
When portfolio managers identify securities with the desired capitalization, profitability, value, and past performance characteristics, they seek to include these securities in the broadly diversified portfolio. 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. The portfolio managers may dispose of a security if it no longer has the desired market capitalization, profitability, or value characteristics. When determining whether to dispose of a security, the portfolio managers will also consider, among other things, relative past performance, costs, and taxes. The portfolio managers review the criteria for inclusion in the portfolio on a regular basis to maintain a focus on the desired broad set of non-US companies . . .
The fund is an actively managed exchange-traded fund (ETF) that does not seek to replicate the performance of a specified index. The portfolio managers continually analyze market and financial data to make buy, sell, and hold decisions. When buying or selling a security, the portfolio managers may consider the trade-off between expected returns of the security and implementation or tax costs of the trade in an attempt to gain trading efficiencies, avoid unnecessary risk, and enhance fund performance.”
This is classic “smart-beta” stuff. A bit more “quant” than “passive” but with a lot of the characteristics of passive (low-cost, broadly diversified, low turnover, disciplined).
“#2 Process Designed for Consistency As part of our portfolio management and trading processes, we analyze whether the benefits of a trade overcome its associated costs and risks. We seek to methodically harness return premiums while managing implementation costs and aiming to mitigate portfolio risks to generate enhanced returns over time.”
Well, that's what DFA claims is one of its big advantages over a “normal” index fund. By not being “strict” about indexing, it tries to eke out some little advantages by avoiding expensive trades.
“#3 Enable Investors to Build Customized Asset Allocations All Avantis Investors strategies use the same academically sound risk/return framework uniquely designed for Avantis investors. We use our understanding of investors’ needs to deliver transparent investment strategies that work well inside a broader asset allocation.”
That's mostly just investment gobbledygook, but transparency is good.
“#4 Cost Conscious Scalable, efficient portfolio construction and engineering allows for broadly diversified solutions with low rebalancing costs, capital gains and fees. We expect to pass these savings on to our investors through lower management fees.”
Well, that's a good thing. We know that the reason passive investing beats active management most of the time is because of its much lower costs. To give active management the best possible chance to win in the long run, you have to keep costs low. When you look at the Avantis ETFs I'd consider using, you can see the costs are way less than industry mutual fund averages for actively managed funds (something like 1%).
- US Equity (AVUS): 0.15%
- US Small Cap Value (AVUV): 0.25%
- International Equity (AVDE): 0.23%
- International Small Value (AVDV): 0.36%
- Emerging Markets Equity (AVEM): 0.33%
- Emerging Markets Value (AVES): 0.36%
Obviously, these ERs are not as low as those at Vanguard, but they're not ridiculous. They're not high enough that they're OBVIOUSLY going to keep these funds from beating a typical index fund. Expense ratios matter, but at a certain point, they're not the most important thing.
Should You Use Avantis ETFs?
Let's get to the question that has been rattling around in your head since you clicked on this article. Should you use Avantis ETFs, and if so, how and which ones?
Short Track Record
The first reason NOT to use these ETFs is that they're brand new. As I write this article, their funds range from five days to four years old. A year or two is not a track record for active management; it's just a random blip of data.
Active Management
The second reason not to use Avantis ETFs is simply that they incorporate at least a little bit of active management. The data on active management when it comes to stocks is incredibly depressing and one-sided. If you really believe a little active management is good, why wouldn't more be even better?
Performance Comes and Goes But Expenses Are Forever
The third reason not to use Avantis ETFs is the additional expense. While the ER differences might be small (for example, AVUS is 0.15% while VTI is 0.03%), that's still a 12 basis point hurdle that the Avantis strategies must overcome before it can start earning real alpha. It's even larger in other asset classes. For example, AVUV is 0.25% but VBR is 0.07%, an 18 basis point difference. Since Avantis, like DFA, is a for-profit company and Vanguard is mutually owned, some chunk of that difference is profit, while the rest is additional cost and a lot less economy of scale.
Securities Lending
A fourth reason to avoid Avantis is securities lending. While Vanguard investors get to keep 98%+ of the income from securities lending by the fund, Avantis investors only get 90%. That's more than some companies but still less than Vanguard.
Tax-Efficiency
Vanguard index funds and their ETF equivalents are very, very tax-efficient. Does Avantis do just as well? It's a little hard to compare apples to apples here, but the most recent VTI prospectus shows a five-year pre-tax return of 8.72% and an after-tax return after paying the tax on distributions of 6.82%. That's a loss of 21.8% to taxes. The most recent AVUS prospectus (for a different time period) shows a loss of 21.8%, essentially a tie. But given that most Avantis funds have a bit more of a value tilt, you would expect lower tax efficiency.
The Track Record Does Show a Difference
With those five downsides, why would an informed passive investor choose to use an Avantis ETF over a Vanguard one? The main reason is that they expect higher performance. So far that seems to be the case, as demonstrated by my emailer. It's easy enough to do a few comparisons myself, though. Let's compare VTI to AVUS. Three-year data is available at Morningstar.
- VTI: 13.33
- AVUS: 16.04
Whoa! That's a big difference. You don't get that just from “indexing better. ” We'd better look under the hood.
As of this writing, VTI owned 3,854 stocks and had 3% turnover. AVUS had 2,331 stocks and 4% turnover. VTI had an average market cap of $134 billion and a P/E ratio of 19.34 while AVUS had an average market cap of $68 billion and a P/E ratio of 15.34. In short, AVUS is smaller and more value-y than VTI. Is that the reason for the outperformance? Well, the three-year return for VBR (Vanguard's small value fund) is 18.65% per year, so those tilts likely explain most, if not all, of the AVUS outperformance. Small and value have outperformed over the last three years.
Let's compare the small cap value offerings between Vanguard and Avantis:
- VBR: 18.65% per year for the last three years, $5.16 billion average market cap, 11.72 PE ratio
- AVUV: 27.25% per year for the last three years, $2.33 billion average market cap, 8.70 PE ratio
This is kind of the same story we always saw with DFA. When small and value did well, DFA outperformed Vanguard because it had larger small and value tilts. When small and value didn't do well, Vanguard outperformed DFA. What happens in the long term really comes down to what you believe will happen with small and value factors.
But you do have an alternative. You can simply tilt MORE with a Vanguard-based portfolio than an Avantis-based portfolio. Instead of a ratio of 4:1 total stock market to small value, perhaps you could tilt 3:1 and get the same benefit, all while enjoying lower expenses. At any rate, the fact that these tilts are embedded in the Avantis funds makes it very hard to compare apples to apples when evaluating the value of anything else it's doing besides tilting toward factors.
The addition of the profitability factor confuses things a bit more but, thus far, seems to be a good thing.
Getting Access to Other Asset Classes
Vanguard doesn't offer a fund or ETF for international small value or emerging markets value. If those are important asset classes to you, it would make sense to use the Avantis ETF for that asset class.
More information here:
People Still Believe in Active Management?
How I Might Use Avantis ETFs
I'm not quite ready to abandon my long-term use of Vanguard ETFs/funds based just on short-term data, but since most of my portfolio is now in a taxable account, I actually need two ETFs for each asset class for when I tax-loss harvest. Maybe I should consider using the Avantis ETFs instead of what I am using now for a tax-loss harvesting partner.
Let's look at each of these one by one.
Domestic
We've already looked pretty carefully at VTI and AVUS here. We know that they have significantly different portfolios in that AVUS has a much smaller and more value-y portfolio. That's not the case with ITOT. ITOT has a three-year performance that is almost exactly the same as VTI. If I used AVUS as a TLHing partner, I would be changing my tilts significantly. That's not really something I want to do, so I'll stick with ITOT.
Small Value
Small value is a lot trickier, as I've written about before. VIOV is much smaller and a little more value-y than VBR, so swapping those changes my factor exposure significantly. AVUV would have a similar issue. AVUV is more value-y than VIOV, but VIOV is smaller. VIOV (0.15%) is more expensive than VBR (0.07%) already, so the additional expense of AVUV (0.25%) isn't as big of a deal. Performance data gives the nod to AVUV (27.25% vs 19.17% per year for the last three years) so I think I may just start using AVUV instead of VIOV. I'll have to spend some more time thinking about whether I want to use it as my main holding (and possibly decrease my tilt percentages, currently 25:15 VTI:VBR). I passed on hyper-small and value-y RZV years ago, but AVUV is significantly more diversified than RZV.
International
VXUS and IXUS are extremely similar funds, and they make excellent tax-loss harvesting partners. The main problem with using AVDE is that it is a developed country-only fund. There is little to no emerging markets exposure. So, if I wanted to use it as my partner, I would have to combine it with an emerging markets fund such as VWO or AVEM. I don't want that complexity. I'll stick with VXUS and IXUS.
International Small
Our original investment plan, written way back in residency, said this about international small and international small value asset classes:
“We will tilt the portfolio toward mid-cap and small-cap stocks in an effort to increase returns so long as reasonably priced investments are available, both domestically and internationally
We will tilt the portfolio slightly toward value stocks, both domestically and internationally. This will be maintained by the purchase of specific value stock mutual funds if necessary and so long as reasonably priced investments are available.”
In 2006, there were no reasonable international small and international value options, so we did not tilt at all internationally. When Vanguard came out with its international small fund in 2009, we quickly added it to our portfolio. But still, over the years, I have not yet found a really great passive international small cap value fund. I knew DFA had one, but I wasn't willing to hire an advisor to get it. Is AVDV the fund I've been waiting for? Should it simply replace VSS as our main holding? Should it replace SCHC as the tax-loss harvesting partner? Let's take a look at it in detail.
- VSS includes both developed and emerging markets, costs 0.o7%, and contains a small but not a value tilt. The PE ratio is 12, and the average market cap is $1.72 billion. The three-year performance is 6.84%. It holds 4,224 stocks, and it has a turnover of 17%.
- SCHC only includes developed markets, costs 0.11%, and contains a small but not a value tilt. The PE ratio is 11.9, and the average market cap is $2.0 billion. The three-year performance is 6.41%. It holds 2,221 stocks, and it has a turnover of 18%.
- AVDV only includes developed markets, costs 0.36%, and contains a small and a value tilt. The PE ratio is 7.75, and the average market cap is $1.62 billion. The three-year performance is 12.64%. It holds 1,329 stocks, and it has a turnover of 21%.
That's a pretty serious performance difference. It's hard to know how to attribute that. It could be the lack of EM exposure, as EM has underperformed in the last few years. But if that were the main reason, you would expect SCHC to have beaten VSS, which it did not. It may very well be the value tilt. We know value outperformed the domestic market over the last three years, and comparing the Avantis International fund to the Avantis International Large Value fund, we see that occurred internationally too, at least over the last year. Some of the outperformance may also be the Avantis active management strategies minus the additional cost of those strategies.
But this is all enough for us to at least think about swapping, and I'm talking about our main holding, not just our tax-loss harvesting partner. It's hard to get perfect here. You either have to leave out EM, or you have to skip the value tilt. And the additional cost (29 basis points) is pretty large. At any rate, even if we wanted AVDV, this asset class is entirely in taxable for us now. Swapping would involve realizing six figures in capital gains, using up a significant part of the tax losses we're carrying forward in case we sell the house or The White Coat Investor. VSS would become a legacy holding for us, and we'd start using it for charitable donations. So, we'd probably just start with new money going into AVDV for now. But it'll be nice to have something stock-related to discuss during our monthly financial meetings. It's been a long time since that happened. We also have to be careful that we're not just performance-chasing, because performance has a bad habit of disappearing on us just as we start chasing it. Now that DFA also has ETFs, one could also use the Avantis AND the DFA ETFs as tax-loss harvesting partners.
Avantis funds are a great new option for savvy investors and worth a careful look. While the expenses are higher than Vanguard index funds/ETFs, the tilting and execution just might be worth the price.
What do you think? Do you use Avantis ETFs? Are you considering changing? Why or why not?
Thank you for making a complex topic and comparison quite accessible and insightful.
Excellent article. These are my favorites from WCI.
I think that you covered the topic completely and came to the the correct conclusions with one minor exception. In my mind, even though the Avantis funds have a relatively short track record, I believe that it is fair to consider the DFA track record when considering investing with Avantis, as the principals and the processes have been imported from DFA. While the individual funds are slightly different from their DFA counterparts, their attributes and performances track very closely. Avantis has been so successful that I believe that they have pushed DFA into rolling out more ETFs and at a quicker pace than they had intended.
As a long term DFA investor and small-value tilter, of course I have added some Avantis funds and have used them as TLH partners for my DFA holdings similar to your examples as above.
Well done.
I agree the philosophies and products are very similar. In fact, DFSV is my tax loss harvesting partner for AVUV and I actually have more in DFSV at the moment.
What made you choose DFSV over DFAT? The latter is rated higher by Morningstar and is also a small cap value fund.
Maybe I should look into that. Probably because when I Googled DFA SV ETF I got DFSV, not DFAT. I guess I assumed they would only have one and I probably wasn’t sure what “targeted value” meant. I’m also unsure how Morningstar has a 15+ year track record on this ETF since DFA hasn’t been doing ETFs that long. Must be an ETF share class of a traditional fund that’s been around for a while. But comparing them on Morningstar they look very similar. I don’t pay attention to Morningstar ratings and so have no idea why it has a higher morningstar rating.
At any rate, DFSV is my back-up TLHing holding. My primary holding for US SV is the Avantis ETF. Maybe I’ll look at DFAT at some point. I can’t imagine it matters much.
You also have dimensional etfs available now too. DFSV is dimensional’s us small cap value etf with an expense ratio of 0.31 vs AVUV 0.25, a difference of 0.06, so close expense wise. AVUV has been the winner, though, with 1 year return 0.69% vs -0.76%.
Both continue to be crushed by the total (us) market at up 10.7% past 12 months.
Also if it’s true these active (although rules based funds) are a good deal then perhaps the active vs passive debate is really whether active is worth it but only if the fee is 0.3 or less.
Was just going to mention this. I use both the Avantis and DFA ETFs for factor tilting. We face different superficial loss rules in Canada, but I sometimes use the pairing for tax loss harvesting.
-LD
The main advantage passive has over active absolutely is the lower fees. Lower the fees on active management and beating the market becomes at least a reasonable bet rather than an insane one.
Thank you for your analysis. I’m a public school teacher with Avantis funds. I’m very happy. It is worth nothing that when a lot of equities go down, like most did in 2022, my globally diverse Avantis portfolio was down 13%. Loosing less is winning too.
Jim dominating article as always! DFA and Avantis seem to add a profitability screen to their funds/etf’s, but it seems also that some passive indexes that are not made by Russell also add profitability criteria to be included in their index. for example your recent post on the Russell 2000 Value underperforming S&P600 Value index might have to do with the Russell not having a profitability criteria when entering it’s index, while the S&P does. Do you think DFA/Avantis active inclusion of profitability will outperform the passive inclusion of the profitability factor such as in the S&P indices?
Also, you cited in your small cap value article that VBR tracks the CRSP small cap value index. do you know if the CRSP indices also include a profitability criteria to enter it’s indices?
I don’t know. Good question though.
I don’t think the CRSP index VBR tracks has any sort of a profitability screen.
“AVUS has a much smaller and more value-y portfolio”
Yes, that’s why I use it.
I’ve wanted to use DFA since the mid-90’s but was too cheap to pay an advisor. It is good to have options now.
Thank you for your analysis. I’m a public school teacher with Avantis funds. I’m very happy. It is worth nothing that when a lot of equities go down, like most did in 2022, my globally diverse Avantis portfolio was down 13%. Losing less is winning too.
Avantis is about factor tilting, but it can adjust its factor exposure; there’s no index to follow. At present, Avantis funds don’t comparatively have a lot of AUM. As AUM increase, will they keep the same factor exposure? In active management, scalability can be an issue. But if factor exposure decreases in the future and you’re investing in a taxable account, will you be able to leave?
Larry Swedroe became somewhat disaffected with DFA, and one of the reasons he gave was that factor exposure decreased, as AUM increased.
All good questions and one of the risks of this type of investing.
This is what worries me as well – 1. There’s no official SC index, so who is to say the previous research applies to whichever index Avantis chooses? 2. Will good performance of Small cap value lead to… decreased value of Small Cap companies originally perceived as SCV? Am I going a bit crazy here or?
I’m a financial advisor with access to DFA funds; we use both DFA and Avantis, but I’m as big of a proponent of Vanguard funds for all the reasons know to Jim and the loyal, astute followers of this site.
We recently had a meeting with our representative from Avantis, who explained their methodology in detail. As I understood it, it most resembles factor-based investing, with an additional screening process for companies. For example, within their small-cap fund, they’ll tilt toward companies that have attributes that, based on historical evidence, have outperformed other companies. Specifically, they rank small/value companies by certain factors like profitability and invest greater in small, value companies that have a higher profitability ranking.
I wouldn’t consider this as active as a traditional active manager (stock picking or market timing), and it’s based on science…but I suppose some would consider that active management.
Last point: when our firm thinks about investing, even a time frame as large as three years may not be sufficient to bear out long-term trends. In other words, even if Avantis has outperformed Vanguard since the inception of its funds in 2020, the outperformance from then to now isn’t sufficient to conclude that they’re better and that the strategies will continue to outperform.
I’m not entirely confident which will be better in the next 1-10 years. I figure it’s a coin flip – you can’t go wrong with either.
Just my two cents – thanks for the interesting perspective!
https://www.magicformulainvesting.com/Account/LogOn?ReturnUrl=%2FScreening%2FStockScreening
It sounds like they are adapting Joel Greenblatt’s Magic Formula with a little individual screening, which makes sense, since these value screeners sometimes don’t detect odd facts, like billion dollar pension overhangs.
“‘The Magic Formula, as explained by Joel Greenblatt in his book The Little Book that Beats the Market, involves ranking stocks based on two metrics: earnings yield (EBIT/enterprise value) and return on capital (EBIT/invested capital).”
Strangely, Greenblatt’s mutual funds drifted into high fee, short/long funds, which seem to not always work out in beating the market.
Avantis has an emerging market ETF that is smaller and more value oriented called AVES. AVES is more of an “all caps” value fund. Supposedly, emerging markets are difficult to target with a fund that exclusively invests in small companies so that is the reason for the all caps. Technically, it is a mid cap value fund.
I use it with AVDV for international small value tilt
My portfolio is the following and is a 25% global small value tilt
SP 500 fund from my 401K
AVUV
EFAE fund (only 401k international option)
AVDV
VWO
AVES
I know a little more complex but this is the only way I could achieve a global portfolio with a small value tilt at a very low cost.
It’s not a bad option, but it does introduce additional complexity. yet another fund. And a fund for which it is very hard to find a tax loss harvesting partner.
For anyone following along, Katie and I decided this morning to go ahead and SV tilt our international. So we’ll be gradually moving from VSS to AVDV/DISV. Probably take years to fully make the transition as we donate appreciated shares of VSS to charity and replace them with the others. Or a big bear market might speed the process up!
Considering these funds don’t include emerging markets, are you using Avantis and DFA’s emerging small cap fund/etf too?
I’m not currently, mostly just for simplicity’s sake. TISM of course does include EM and my ISV slice is only 5% of portfolio, so the EM slice of that would only be 1% or so. It would be nice if the funds included it but I’m not losing sleep over it. My old holding, VSS, did include EM but was only a small fund, not a small value fund.
A while back I emailed Avantis and asked them about their expense ratios and whether they included securities lending income and how this compared to Vanguard. This is the response I got back.
“These expense ratios do not consider income generated from securities lending, so revenue generated would add to net performance of the funds. Since Vanguard is their own lending agent, they can choose to pay themselves a nominal service fee and pass on all the revenue to the funds. We use an outside lending agent, State Street, so net revenue is split between the fund (90%) and the lending agent (10%).”
Evidently American Century doesn’t have the infrastructure to handle securities lending so they hire State Street. None of the securities lending income is being kept by Avantis to increase their profits as that whole 10% goes to State Street.
They other thing about Avantis (American Century) that I like is that over 40% of American Century Investments’ profits go to their controlling owner, the Stowers Institute for Medical Research , a world-class biomedical research organization dedicated to defeating life-threatening diseases.
So at least about half the income they make off these investments goes to a worthy charity.
Please explain your technique of “tax lost harvesting partners”.
How do you set it up and how do you determine when you will use the technique?
Read this post, then if you have any additional questions let me know.
https://www.whitecoatinvestor.com/tax-loss-harvesting/
This is a great article. Thank you for your analysis. I’m actually 70% VT and 30% AVGV is some tax deferred accounts.
I like it, Steve! How did you decide on this set up, specifically the percentage of AVGV? I run VTI/VEA/AVUV/AVDV/AVES 45%/20%/15%/10%/10% in several of my tax protected accounts but the simplicity of VT and AVGV is appealing. Looking forward to hearing back from you.
Very bad analysis. So many red flags I don’t know where to begin.
Advice to others: stick to reading the work of someone with formal education in finance for these topics.
Larry Swedroe is a great start if you want to learn about the cost/benefit of factor based ETFs vs Vanguard. His book Your Complete Guide to Factor Based Investing is a great introduction.
Good luck.
Larry is that you? 🙂
Seriously though, I know you don’t know where to begin with real criticism but it’s not particularly helpful to people if you don’t.
I like Larry’s writing, but he has a nasty habit of advocating for a new asset class in your portfolio just before it starts tanking in value. None of us are perfect.
I’m sorry I was rude and also lazy. I think I was consistent though. I did not formally study finance so even though I feel informed I thought it was best to refer people to someone who has the credentials and experience on this topic.
Anyway, you didn’t really get into Avantis’ methodology and how it is backed by a lot of academic research. That is the main reason to invest in their products. If you missed it, they talk about their methodology in this pdf, but they have also released actual papers to back it up:
https://www.google.com/url?sa=t&source=web&rct=j&opi=89978449&url=https://res.americancentury.com/docs/inst-avantis-scientific-approach-to-investing.pdf&ved=2ahUKEwiW54aJ8tCEAxV9FlkFHYmhDTYQFnoECBYQAQ&usg=AOvVaw1iDMO-vvx_21BTl8rXef1E
To compare performance, you only used 3 year return numbers. This is extremely bad practice. Anyone with a finance education would consider 3 years of returns noise, which cannot be predictive of future returns. Likewise, almost all available ETFs have too short a track record to provide any statistically reliable predictive power.
So what’s the answer? Look at the underlying methodology of the ETFs in question. Many of these methodologies have been studied academically ad nauseam, and there are publicly available theoretical returns that anyone can look at and do backtests on.
What you find when you look at this is that strategies like Avantis have tended to outperform a Market cap weighted index such as Vanguard for at least a century and it’s highly statistically significant, even after costs.
I am not Larry lol but I know his work well, and the reason he recommends these things is simply because he understands the products, and the research that supports them.
I know there are more red flags in there but I think those were the main ones.
Sorry again for my rudeness!
I agree that 3 years is not very long. But to get any longer term data for Avantis requires backtesting of a fund that didn’t exist. It’s not my fault their track record is short. One could substitute in the DFA track record, but that’s not quite the same thing.
Backtesting has lots of issues whether used in finance or medicine.
I believe in the theory behind this stuff, that’s why I tilt and use them. I wouldn’t have 20% of my portfolio in Avantis SV funds if I didn’t. But I’m also cognizant that data found when backtesting doesn’t always hold up when examined in a prospective trial.
In my opinion, the 3 year return number is pretty much unusable on its own as a predictive tool. The only valid use case I see is if you wanted to see how well it tracks a theoretical benchmark to make sure the fund is doing what it’s suppose to, or to see how well it loads on the factors you’re targeting.
Otherwise, the best tool we have at our disposal is theoretical returns. Avantis has these available going back quite a few years. Advisors can request this data from them. Avantis is also targeting primarily value and profitability factors. You can look at many theoretical returns for these factors on the Kenneth French dataset for example.
I agree there are many issues with this. Finding good data in finance is a big issue. Unfortunately it’s the best we have.
It seems that you already understand the research backing this if you’re allocating to it. Maybe I missed something from your post. I should have read it more thoroughly.
Great article. Would be great if you could write an updated one to include the new DFA ETF’s. I’m particularly interested in International where it seems there could be greater tax efficiency with DFA which show much higher rate of qualified dividends.
Thanks
We currentliy use two Avantis and two DFA ETFs and consider them similar enough to be tax loss harvesting partners. (SV and ISV). Not sure I have a super strong preference either way.