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A fresh wave of ETFs just landed in Canada, promising to upgrade the way investors build portfolios. Unlike traditional index funds that simply mirror market cap weightings, CIBC’s new Avantis ETFs leverage decades of financial research to tilt toward smaller, cheaper, and more profitable stocks—offering a smarter, cost-efficient path to better expected returns.
Why Most Canadian Investors Still Pay Active Fund Fees
Despite the rise of passive investing worldwide, over 80% of Canadian mutual fund assets are still locked in old-school active management as of year-end 2024. This means most Canadian investors are handing over steep fees—often north of 1%—to funds managed by the big five banks, frequently earning less than the market in return. The challenge of beating the market is well documented: active managers rarely do it over the long haul, making this a losing game for most.
Enter low-cost index funds. Since Vanguard introduced the first one in 1976, index funds have steadily gained ground. They simply replicate a market index, offering broad diversification with rock-bottom fees. The logic is beautifully simple: markets are efficient enough that chasing outperformance is costly and often fruitless. Index funds capture the market’s equity risk premium without the gimmicks and extra fees.
What Traditional Index Funds Miss
Market-cap weighted index funds do have their limits. They overweight the largest companies—think Apple, Microsoft, the mega-caps dominating the headlines—and underweight smaller, potentially undervalued stocks. While this approach captures the broad market, it ignores well-established return premiums tied to specific stock characteristics.
For decades, researchers have found that certain groups of stocks tend to outperform others. Smaller companies, those trading at lower prices relative to their book value, and more profitable firms historically earn higher returns. The famous 1993 Fama and French paper drilled deep into these risk factors, confirming that not all equities are created equal.
Another cost to index fund investors often goes unnoticed: when indices update their components—adding new IPOs or adjusting for stock buybacks—index funds must trade accordingly. This mechanical rebalancing has been found to cost investors roughly 0.5% annually in implicit expenses.
Avantis: A Smarter, Low-Cost Approach Comes to Canada
This is where Avantis ETFs shake things up. They’re the Canadian-listed incarnation of a strategy pioneered by Dimensional Fund Advisors, which has quietly led in evidence-based investing since 1981 but whose funds remain largely inaccessible to average Canadians without financial advisors.
Launched by former Dimensional executives under American Century Investments’ umbrella, Avantis ETFs make this sophisticated approach available domestically—no USD conversions, no foreign withholding tax headaches, no juggling multiple ETFs. You get direct Canadian listings with broad diversification and systematic tilts toward those high expected return factors.
Under the Hood: How Avantis Portfolios Tilt
Each Avantis ETF shares a common philosophy: tilt portfolios toward smaller, cheaper, and more profitable stocks compared to typical market capitalization-weighted benchmarks. The extent of these tilts varies by fund focus, shaping different risk-reward profiles.
Take the CACE, Avantis’s Canadian Equity ETF, with a 0.19% management fee. Compared to a standard Canadian market index, it leans away from mega-cap, pricier, less profitable stocks and increases exposure to smaller, more attractively valued, and more profitable companies. This composition aligns directly with decades of academic evidence indicating these traits deliver superior expected returns over time.
But be warned: this means performance may diverge significantly from the market, including potential prolonged periods of underperformance. For instance, in recent years, the U.S. market’s biggest, highest-priced companies have led returns, leaving value and smaller stocks behind. Investors embracing Avantis’s strategy must be comfortable with this volatility and stay focused on the long-term prize.
Avantis’s U.S. and International ETFs: Targeted Tilts Across Markets
Avantis also offers several U.S. equity ETFs, tailored by market cap and tilt intensity. The CALV (US Large Cap Value ETF, 0.25% fee) focuses strictly on large caps but tilts toward cheaper, profitable stocks. The CAUS (US All Cap, 0.19% fee) is a total market fund with moderate tilts, while the CAUV (US Small Cap Value, 0.35% fee) goes all-in on the smallest, cheapest, most profitable stocks, expecting higher returns but with more market deviation.
On the global front, the CADE International Equity ETF (0.29% fee) excludes Canada, tilting moderately toward high expected return stocks in developed international markets. The CASV Global Small Cap Value ETF (0.39% fee) offers targeted exposure to the most attractive small caps worldwide, including the U.S. There’s even an emerging markets fund, CAEM (0.39% fee), following the same value and profitability principles.
The Crown Jewel: CAGE, Avantis’s All-Equity Asset Allocation
For investors wanting a one-stop solution, the CAGE ETF is Avantis’s answer—a globally diversified equity portfolio similar in concept to Vanguard’s VEQT but enhanced with evidence-based tilts across all regions. It bundles together Canadian, U.S., international, and small-cap value exposures into a single, low-cost ticker, simplifying implementation without sacrificing strategy integrity.
The Science Behind the Strategy
Anchored in Nobel-winning research by Eugene Fama and Ken French, Avantis’s approach exploits three key premiums embedded in stock prices:
- Value Premium: Stocks priced low relative to their book value are expected to yield higher returns due to higher risk and discount rates.
- Profitability Premium: More profitable companies generally command higher expected returns.
- Investment Premium: Firms with higher investment (asset growth) typically have lower expected returns, so avoiding these can boost performance.
Avantis ETFs don’t chase any one factor blindly; they combine value and profitability tilts while considering company size—striking a balance that targets multiple sources of return.
This isn’t just about chasing bigger returns—diversifying among these premiums can smooth out performance over time. For example, the infamous U.S. “lost decade” from 1999 to 2010 saw the broader market stagnate, but small cap and value stocks delivered meaningful gains.
Why This Matters Now More Than Ever
Index funds are still a sensible choice for many Canadians, but the introduction of Avantis ETFs expands the toolkit. Unlike cap-weighted funds that mechanically buy IPOs at likely overvalued prices once added to the index, Avantis exercises judgment—only including new listings when financial data supports attractive valuations.
With upcoming public offerings from giants like SpaceX, OpenAI, and Anthropic, this approach could shield Canadian investors from expensive forced buys common in traditional ETFs.
For those ready to go beyond simple indexing, Avantis ETFs offer a compelling blend of academic rigor, real-world accessibility, and cost-efficiency—crafted for Canadian markets and investors. For a portfolio manager-guided discussion tailored to your situation, firms like PWL Capital are now equipped to guide you on integrating these funds into your strategy.
The full story behind this shift, the nuts and bolts of the valuation models, and nuanced discussions on IPO mechanics are explored in greater detail in associated videos, including Ben Felix’s in-depth breakdowns worth a look if you crave the nerdy details.
