Investors concerned about market concentration risk may want to consider value-oriented investing.
Phil McInnis, chief investment strategist at Avantis Investors, recommends taking a more diversified approach rather than simply focusing on index funds, such as S&P 500 Index. He believes his firm’s exchange-traded fund strategy can deliver better returns over the long term, focusing on companies with lower valuations and strong balance sheets.
“We’re going to reduce concentration,” he said this week on CNBC’s “ETF Edge.” “So we’re making a lot of smaller bets on these lower-valued, better-profitable companies that will pay off over time.”
Avantis’ U.S. Large Cap Value ETF (AVLV) tracks the Russell 1000 Value Index, but there’s a caveat – the fund manager uses profitability overlays to screen stocks.
“We also look at profits as we screen and identify companies that are trading at more attractive prices,” McGinnis said. “This goes beyond typical passive instruments, which are based on a single variable or an entire Summary of Variables to Define Value and Growth.”
back apple and Yuanthe second-largest holding of large-cap value funds is JPMorgan, costco and Exxon Mobil, according to FactSet. Financial services and retail are the most heavily weighted industries, each accounting for about 15% of the portfolio, with energy ranking third at nearly 12%.
“Starting at the company level, these industries are spin-offs and we do put caps on those industries to make sure those bets aren’t too big and we don’t get too concentrated in a single industry,” McGinnis added.
Avantis’ large-cap value ETF was up 7.7% in 2024 as of Friday’s close. The Russell 1000 Value Index gained 4.5% over the same period.
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