How to Incorporate the Avantis CIBC Global Small Cap Value ETF (CASV) Into a Canadian ETF Portfolio

Canadian investors interested in factor investing no longer need to rely on U.S.-listed ETFs from Dimensional Fund Advisors or Avantis Investors. The latter recently partnered with CIBC to launch a full lineup of Canadian-listed factor ETFs, which I covered in a previous article.

The one that caught my attention most was the Avantis CIBC Global Small Cap Value ETF (CASV). What makes it interesting is that even on the U.S. side, there has historically been a lack of true global small cap value ETFs.

Usually, investors need to stitch together separate U.S., international developed, and emerging markets funds to get that exposure. CASV packages all of it into a single ticker. Honestly, I am pretty impressed Canada got this before the U.S.

Personally, I am not a factor investor. But I do think that if you are trying to outperform the broad market over long periods, factor tilts are one of the more academically grounded ways to go about it compared to traditional stock picking.

Thankfully, CASV is also reasonably priced for an active ETF. The management fee is 0.39%, though the full management expense ratio (MER) will not be known until the fund has been operating for a year.

The ETF itself uses the MSCI World Small Cap Value Index as its benchmark, and I think it has a reasonable chance of outperforming that benchmark over time through implementation and security selection. But enough background.

Today, I want to go over how I would personally use CASV if I were building a Canadian ETF portfolio around a small cap value tilt. And I think there are two reasonable ways to approach it.

Pair It with Your Favorite Asset Allocation ETF

CASV pairs very well with existing broad market asset allocation ETFs. For instance, if you are already invested in something popular like the iShares Core Equity ETF Portfolio (XEQT), adding a small cap value tilt is as simple as carving out a portion of the portfolio for CASV.

Now, I am sure you can run a back test and find some historically optimal allocation. But keep in mind that backrests are rearward-looking. You do not want to rely too heavily on them because it is a bit like driving using only your rearview mirror.

The more important thing is choosing an allocation you can actually stick with during periods of underperformance. That is really what factor tilting comes down to.

You are intentionally introducing tracking error relative to the broad market. Sometimes that tracking error will be positive. Sometimes it will be negative. You want a position size where you are not going to panic or feel regret either way.

If you are using XEQT as the core of your portfolio, which for those unfamiliar is a globally diversified 100% equity ETF with exposure to U.S., international developed, and emerging markets alongside a roughly 25% Canadian home country bias, I generally think starting small makes sense.

Even a 10% allocation to CASV can be meaningful. If small cap value outperforms, you may get some incremental alpha. If it lags, it is not going to materially derail the overall portfolio.

Personally, I think it is easier to scale up later than scale down. Scaling down requires selling, and that introduces behavioral issues and potentially taxes in a non-registered account.

That said, if you want a more pronounced factor tilt, something in the range of 20% to 30% paired with XEQT can also work. Just understand the trade-off: the larger the allocation, the larger the potential outperformance, but also the larger the potential underperformance. It really is a double-edged sword.

Still, I do think CASV complements a broad market ETF well. Market cap-weighted portfolios like XEQT naturally lean heavily toward large-cap growth stocks, especially in the U.S. market today. Adding a global small cap value ETF helps balance that exposure somewhat.

One final point is rebalancing. Keep it disciplined and mechanical. Do not try to tactically rebalance based on whichever strategy is outperforming at the time. Personally, I would not even bother with threshold bands. You want to minimize turnover, especially in taxable accounts.

For myself, if I were implementing this, I would probably rebalance semi-annually. Even once per year on the first trading day of the year is perfectly reasonable. The important part is consistency and keeping emotions out of the process.

Pair It with Non-Correlated Assets

This second approach is for those of you who really believe in factor tilting and want to lean heavily into CASV. Even then, while the academic research supporting small cap value is absolutely substantial, you are still taking on 100% equity risk.

And by that, I mean that although CASV is diversified across sectors, geographies, and factors, it is still stocks at the end of the day. If equity markets sell off broadly, CASV is probably going down with them. That is why I think if you are going to commit to a small cap value strategy, it makes sense to pair it with assets driven by completely different forces.

A common answer would be bonds, but I do not think a broad aggregate bond ETF is ideal here. Aggregate bond funds are affordable and diversified, but they tend to dilute the exact characteristic we are looking for.

What I want instead is convexity. I want an asset that historically has had a tendency to rally hard when equities fall and central banks begin cutting interest rates to stimulate the economy.

My pick here would be something a bit more unorthodox like the BMO Long Federal Bond Index ETF (ZFL). ZFL tracks the FTSE TMX Canada Long Federal Bond Index and exclusively holds federal government bonds with maturities greater than 10 years.

This thing is extremely sensitive to interest rate changes. Right now, the portfolio has an average duration of 15.82 years. In simple terms, all else being equal, if long-term interest rates rise by 1%, the ETF’s net asset value would be expected to decline roughly 15.82%. Conversely, if long-term rates fall by 1%, the ETF could rise by approximately the same amount.

That is the convexity we are looking for. Historically, ZFL has done particularly well during periods where central banks aggressively cut rates, such as during the aftermath of the COVID-19 pandemic. On the flip side, during inflationary rising-rate environments like 2022, it struggled badly.

Importantly though, unlike aggregate bond ETFs, there is very little credit risk here because the portfolio consists exclusively of federal government-issued bonds, with no provincial debt, mortgage-backed securities, or investment-grade corporate bonds. The ETF is also fairly affordable with a 0.22% MER and currently pays a roughly 2.7% annualized distribution yield with monthly payouts.

Still, I would not rely exclusively on bonds either. There are rare periods, again like 2022, where bonds and stocks can become positively correlated and both fall simultaneously.

That is why I think adding a third non-correlated asset can make sense. For me, that asset would be gold. Specifically, the BMO Gold Bullion ETF (ZGLD).

Unlike stocks or bonds, gold is not tied to corporate earnings, credit spreads, or interest payments. Its price is driven more by supply and demand dynamics, central bank accumulation, currency concerns, and a healthy dose of speculation.

ZGLD is very straightforward. It physically holds gold bullion and is designed to closely track the spot price of gold during market hours. It charges the same 0.22% MER as ZFL and has grown rapidly to more than $2 billion in assets under management.

So, if I were building a more unconventional portfolio around CASV, a neutral mix might look something like this: 60% CASV, 20% ZFL, and 20% ZGLD. This is absolutely not going to behave like your average asset allocation ETF. But academically, it does check a lot of boxes.

On the equity side, you are tilting toward factors historically associated with higher expected returns, namely value, profitability, and size. Then alongside that, you are pairing it with two uncorrelated assets: long-duration government bonds and physical gold bullion.

Rebalance it periodically, ideally once a year on a disciplined schedule, and I do think this kind of setup has a reasonable shot at beating the market over the very long term.