If you don’t like having expensive items in your portfolio, invest in value-based factor funds.

In my article You Should Diversify Away From Technology If You’re a Long-Term Investor Confident AI Will Improve Productivity, I shared how I’m getting more indirect questions about what actions they should take given market valuations.

I think a common answer is: Avoid companies that are expensive if they worry you?

That answer seems pretty useless for someone whose main strategy is investing in capitalization-weighted index funds like the IWDA. [MSCI World]VWRA [FTSE All-World]CSPX [S&P 500].

You can’t buy the expensive companies because you don’t control the funds. As a company gets bigger and bigger and bigger and takes up more, it becomes a bigger part of the index fund.

If you follow that strategy, you benefit from the company getting bigger and bigger and bigger, but the strategy is not one that… has a valuation layer, or that evaluates whether the company becomes more expensive.

Now you can perhaps understand why some would take action

1. Ask their advisor if it’s okay to stay invested.
2. Should they stop dollar cost averaging into the fund itself given the valuation?

I translate that to: Valuation plays an important role deep in your investment philosophy.

But you’re investing in a strategy (that’s what cap-weighted indexing is) that doesn’t reflect your value-oriented philosophy.

One of the reasons why the majority of the Daedalus Income portfolio is in systematic active funds, rather than systematic passive funds (your IWDA, VWRA, CSPX), is because they better reflect my investment philosophy.

And valuation is an important part of my investment philosophy. I don’t like buying expensive things and that’s why I delegate that task to these funds that help me do that.

I want to bring up one fund, which makes up 8.5% of my portfolio, the Avantis Global Small Cap Value UCITS ETF (ticker: AVGS) as an example here. I’ve talked about Avantis here, with some minor details about AVGS, so you might want to read a bit there to understand that fund better.

I will explain AVGS simply as follows:

1. Take the universe of globally developed small caps: 60% US, 13% Japan, 4.8% UK, 3.8% Canada, 3.7% Australia.
2. Apply value and profitability rankings to this.
3. You get a group of small companies that are very cheap, but still profitable because they eliminate the unprofitable companies, or companies that have growth in investment assets.
4. You get a group of companies that rank higher in terms of cash profitability and that tend to be not that cheap, but not expensive either.
5. This evaluation takes place very frequently and not during 2 or 4 rebalancing periods if they follow a factor index.

By owning AVGS I am investing in a fund that I would have done if I had the time and resources.

We can look at AVGS in more detail in Morningstar link here.

So far AVGS is working 13.3% in USD terms.

The average rating is currently as follows:

1. Price/earnings: 10.5 times
2. Price to book: 1.1 times
3. Price to sale: 0.58 times
4. Price/cash flow: 4.7 times
5. Dividend yield: 2.8%

But AVGS can actually be seen as two parts: US and International, and we can see their performance by looking at two US funds from Avantis that employ the same small-cap value strategies:

1. Avantis American Small Cap Value ETF (AVUV) – 2.44% YTD performance.
2. Avantis International Small Cap Value ETF (AVDV) – 41% YTD performance.

The US share is probably closer to 66% at the beginning of the year and the international share at 33%.

Based on performance, you can see that the US small cap is a mess at 66%, and the international one is a whopping 41%.

Here’s what they look like on the graph. AVDV in orange, AVUV in cyan, and the other line in between is AVGS:

But now that international profits have reached 41%, is it wise to hold on to them?

I have this mental question because I also own USSC, the SPDR MSCI USA Small Cap Value-Weighted ETF, and the goal is ultimately to be fully AVGS. But we are supposed to invest for the long term because the same thing can happen to the international small cap value with the small cap value.

If I blinked, I would have missed it.

Now let’s take a look at AVDV’s average rating today:

The price gain is 10 times compared to the benchmark index of 14 times. You also see the historical earnings growth of 271% (much of it due to the weakening of the USD), which is better than the index’s historical earnings growth of under 131%. But what we’re concerned about is long-term earnings growth, and then you get a group that’s still expected to grow at 9.6%.

Without me doing anything, the portfolio is consistently rebalanced to the stocks that can collectively deliver higher expected long-term returns, which are cheaper and more profitable companies.

So whether I buy today or tomorrow, Ultimately, you own companies that are more decently valued.

This fits well with my investment philosophy.

But maybe not for you, if you have an aversion to cheap and profitable things.

Or how expensive something is is not that important to you.

Either way, there are funds that can help you express your investment philosophy. Use the right one.

If you are in IWDA and that is a problem you may want to consider IWVL or iShares Edge MSCI World Value Factor UCITS ETF. This year it was 34%, because the developed international value did so well.

The average PE ratio is 14 times. IWDA is currently 26 times.

If you want to trade the stocks I mentioned, you can open an account with Interactive real estate agents. Interactive Brokers is the leading, low-cost and efficient broker that I use and trust to invest and trade my investments in Singapore, the United States, the London Stock Exchange and the Hong Kong Stock Exchange. Lets you trade stocks, ETFs, options, futures, forex, bonds and funds worldwide from a single integrated account.

You can read more about my thoughts on Interactive Brokers in this Interactive Brokers Deep Dive series, starting with how to easily create and fund your Interactive Brokers account.

Kyith is the owner and sole writer behind Investment Moats. Readers tune in to Investment Moats to learn and build stronger, more solid wealth foundations, how to pursue a passive investing strategy, learn about investing in REITs, and the basics of active investing.

Readers also follow Kyith to learn how to plan well for financial security and financial independence.

Kyith worked as an IT Operations Engineer from 2004 to 2019. He currently works as a Senior Solutions Specialist at Insurance Start-up Havend. All opinions expressed on Investment Moats are his own and do not represent the views of Providend.

You can view Kyith’s current portfolio herewho uses his Free Google Stock Portfolio Tracker.

His favorite investment broker is Interactive real estate agentsallowing him to invest in securities from various stock exchanges around the world, at very low commission rates, without custody fees, near spot currency rates.

You can read more about Kyith here.