What is AVSE? (Pros, Cons, and Strategies)

Planning for retirement or looking to invest in emerging markets? AVSE might be a compelling option. AVSE stands for Avantis Responsible Emerging Markets Equity ETF. This ETF aims to drive investment in emerging markets with a focus on responsible governance and sustainable practices. This blog post will delve into what AVSE is, its pros and cons, and strategies to consider when investing in this ETF.

What is AVSE?

AVSE, or Avantis Responsible Emerging Markets Equity ETF, is designed to provide investors with exposure to emerging market equities, focusing on sustainability and responsible governance. Managed by Avantis Investors, AVSE seeks to invest in companies within emerging markets that are deemed financially promising and adhere to responsible environmental, social, and governance (ESG) practices.

Key Features of AVSE

• Emerging Markets Focus: Concentrates on equities in emerging markets, providing geographical diversification.
• Responsible Investing: Emphasizes ESG criteria, investing in companies that demonstrate responsible governance and sustainable practices.
• Fundamental Criteria: Utilizes a multifaceted approach, considering factors like financial health, valuation metrics, and growth potential alongside ESG scores.

AVSE deploys a multi-factor strategy, weighting securities by factors such as profitability, relative investment, and valuations, combined with ESG criteria to identify responsible investment opportunities in emerging markets.

AVSE Composition

AVSE consists of companies from various sectors within emerging markets, such as technology, consumer goods, and finance. The ETF aims to strike a balance between financial performance and responsible investing. Companies included in AVSE typically have strong governance practices and commitment to sustainability, reducing risks associated with unethical practices.

Pros of AVSE

Diversification

AVSE offers investors exposure to a wide array of companies within emerging markets, which can be an effective way to diversify a portfolio geographically and sector-wise. This diversification helps in risk management and potentially higher returns due to the growth prospects in emerging markets.

Responsible Investing

One of the standout features of AVSE is its commitment to ESG principles. By focusing on companies that adhere to responsible environmental, social, and governance practices, AVSE aims to reduce exposure to risks associated with unethical practices while supporting sustainable development.

Long-term Growth Potential

Emerging markets often exhibit higher growth rates compared to developed economies due to factors such as urbanization, industrialization, and growing consumer bases. Investing in AVSE gives exposure to this growth potential while also prioritizing responsible investment practices.

Cons of AVSE

Higher Volatility

Emerging markets tend to be more volatile compared to developed markets. Factors such as political instability, currency fluctuations, and economic changes can lead to significant price swings, posing a risk for investors.

Lower Dividend Yields

Compared to dividend-focused ETFs in developed markets, AVSE tends to have lower dividend yields. This is because the focus is more on growth and responsible governance rather than high dividend payouts.

Higher Expense Ratio

ETFs focused on emerging markets and ESG criteria often have higher expense ratios due to the additional research and administration required. AVSE has a higher expense ratio compared to simpler market-cap-weighted ETFs, which can eat into long-term returns.

AVSE Investment Strategies

AVSE is suitable for investors looking for long-term capital appreciation and who are willing to accept higher volatility in exchange for the growth potential of emerging markets. Here are some strategies to consider:

Long-term Investment Strategy

Investing in AVSE is a long-term game. Given the cyclic nature of emerging markets and their propensity for higher volatility, a long-term investment horizon (at least 5-10 years) is advisable. This strategy allows investors to ride out the ups and downs of the market and leverage the growth potential of emerging economies.

Dollar-cost Averaging

Given the volatility of emerging markets, employing a dollar-cost averaging (DCA) strategy can be beneficial. By investing a fixed amount regularly, investors can mitigate the impact of market volatility, buying more shares when prices are low and fewer when prices are high.

ESG-focused Portfolio

AVSE can be an integral part of an ESG-focused portfolio. Pairing AVSE with other ESG-compliant investments in developed markets or specific sectors allows investors to build a diversified, sustainable investment portfolio aligned with their ethical preferences.

Rebalance Periodically

Emerging markets are dynamic, and the performance of individual companies or sectors can vary widely. Periodic rebalancing of the portfolio ensures that your investment stays aligned with your goals, adjusting for performance shifts and maintaining the desired asset allocation.

Conclusion

AVSE, with its focus on responsible investing in emerging markets, provides a unique investment opportunity. By balancing growth potential with responsible practices, AVSE is suitable for long-term investors who are comfortable with the higher volatility associated with emerging markets. Through strategies like dollar-cost averaging and periodic rebalancing, investors can optimize their investment in AVSE, aligning it with their financial goals and ethical values.

Whether you're planning for retirement, seeking portfolio diversification, or committed to sustainable investing, AVSE offers a compelling investment option worth considering.