How Avantis Became One of the Fastest-Growing Fund Companies

In the five years since Avantis Investors opened, it’s been in a sweet spot when drawing fund investors. Its lineup features actively managed exchange-traded funds at extremely low costs, which has helped it pull in about $38 billion in flows since its founding. The firm attracted the 10th-most flows of any fund family in June.

The company’s largest fund, the $13 billion Avantis US Small Cap Value ETF AVUV, has hauled in $2.4 billion in flows just this year. It’s also Avantis’ best ETF in terms of performance relative to its Morningstar category, ranking in the 4th percentile according to 3-year returns.

Avantis is “a lot cheaper than a lot of the actively managed stuff out there,” says Daniel Sotiroff, a senior manager research analyst for Morningstar. In addition, “the relative predictability of their underlying strategies” has helped bring in investors.

From Dimensional to Avantis

Avantis, a division of American Century Investments, opened in 2019. It was by former employees of the $539 billion fund shop Dimensional Fund Advisors, including Eduardo Repetto, who had served as co-CEO and co-CIO at Dimensional, and Pat Keating, who had served as COO. Avantis now runs 37 active stock and bond funds, with $50 billion in assets. Like at Dimensional, these funds rely on quantitative models to pick holdings, similar to how strategic beta funds are constructed. Both firms also rebalance their portfolios in small increments throughout the year to minimize trading costs.

This approach has been a big hit. Avantis’ funds garnered over $1 billion from investors in their first seven months, and the cash flow has only grown from there. May 2022 was the firm’s first month with over $1 billion in flows, and out of the 12 months ending in June, only two had flows under $1 billion. Over that period, the firm pulled in $15.5 billion, the 11th most flows of any fund family over the past 12 months.

Avantis vs. Dimensional

While both Avantis and Dimensional run cheap, actively managed funds that focus on systematic investing and have risen on the tides of these investing trends, Sotiroff sees two main differences.

The first is that while both shops have an overall value tilt, Avantis starts with an initial screen for stocks “that are both cheap and profitable,” often focusing on cash-flow-based measures of profit, as they can be less subject to accounting distortions. The element of profitability means “in Avantis portfolios, you will actually end up holding some growth stocks.” It picks stocks according to both the value and quality factors.

The second is that while Dimensional uses a traditional price-to-book value ratio, Avantis looks at the book value minus “intangibles”—non-physical assets like the value of brands, which are difficult to value precisely compared to something like a factory. For example, the Avantis US Small Cap Value ETF, the company’s largest fund, has twice the average cash flow growth of the $3.5 billion Dimensional US Small Cap Value ETF DFSV (20.6% vs. 10.7%).

Despite these differences (which Sotiroff says will likely be larger in more value-tilted funds), he thinks it’s important not to overstate them: “The thing is, they’re holding very broad portfolios, so at the end of the day, the signals kind of wash out. They’re going after the same thing.”

Earlier Adoption Pays Off

Avantis was among the early adopters of actively managed ETFs, launching its first in 2019, the year an SEC rule change facilitated the easy creation of such funds. DFA made the move from running only traditional mutual funds in 2020. “Avantis was kind of the first mover in that area,” explains Sotiroff.

The focus on active ETFs has come at the right time. Eight of the last nine years saw outflows from actively managed mutual funds and flows into active ETFs. This trend has accelerated, with $1.6 trillion flowing out of active mutual funds over 2022 and 2023. As of the end of June, active mutual funds (excluding money market funds) had a total of $13.3 trillion in assets.

Flows for Avantis mirror this trend. All of its largest funds are ETFs, and of its funds’ nearly $50 billion in assets, more than 90% is in its ETFs. It has nine traditional open-end funds, the largest of which is the $850 million Avantis US Small Cap Value Fund AVCNX.

Avantis Gains as Investors Favor Cheap Funds

Another tailwind has been investors’ continuing shift into low-cost funds. As of March of this year, the cheapest quintile of active ETFs holds $325 billion in assets, while the most expensive quintile holds just $35 billion. Avantis’ funds have an average expense ratio of 21 basis points, far less than the 69-point average for active ETFs as a whole.

Active ETFs Are Growing, Stockpicking Isn’t

While active ETFs have been gaining a disproportionate share of inflows—growing from 2% of ETF assets in 2019 to 7% as of the end of March—they aren’t the same as many of the active mutual funds that have been hemorrhaging investor dollars.

Out of the $382 billion in active equity ETFs, about $190 billion was in the systematic strategies of Dimensional and Avantis, while another $50 billion was in JPMorgan’s options income funds, the JPMorgan Equity Premium Income ETF JEPI and JPMorgan Nasdaq Equity Premium Income ETF JEPQ. Meanwhile, one of the best-known stock pickers in the active ETF space, Cathie Wood’s $5.9 billion ARK Innovation ETF ARKK, saw $2 billion in outflows over the past year, the most of any active US stock ETF.