AVES: The Value ETF That Acts Like Growth

An analyst expresses skepticism regarding the conventional approach to emerging market (EM) growth investing, asserting that typical market-cap-weighted EM ETFs are backward-looking, miss early-stage growth opportunities, and carry excessive political and valuation risks relative to US tech. The analysis suggests these broad ETFs compromise true growth potential by focusing on large caps. Instead, value-oriented EM ETFs, such as AVES, are presented as a more compelling alternative offering superior growth and yield potential, despite acknowledging potential drawdown risks.

Analysis

The analysis challenges the conventional wisdom of seeking growth through traditional, market-cap-weighted emerging market ETFs. It posits that this common approach is flawed, as these funds are inherently backward-looking and their focus on large-cap constituents causes them to miss out on early-stage growth opportunities typically found in smaller companies. Furthermore, the argument is made that emerging markets present excessive political, policy, and valuation risks that may not be justified by their growth prospects, especially when compared to the secular tailwinds driving US technology sectors. As a more compelling alternative, the analysis highlights value-oriented emerging market ETFs, specifically citing the Avantis Emerging Markets Value ETF (AVES), suggesting they offer a better profile for capturing both growth and yield, while acknowledging that these instruments still carry potential drawdown risks.

Key Decisions for Investors

• Investors holding broad, market-cap-weighted emerging market ETFs should reassess their positions to determine if the focus on large-caps aligns with their specific growth objectives.
• Consider investigating value-oriented emerging market ETFs, such as AVES, as a potential alternative for capturing growth and yield, while conducting due diligence on their specific methodologies and inherent drawdown risks.
• Evaluate the risk-reward profile of emerging market allocations by weighing the highlighted political and valuation risks against the potential for growth, particularly in comparison to developed market opportunities like US technology.