Investors concerned about concentration risk in the market have been exploring alternative strategies to mitigate potential downsides. Phil McInnis, the chief investment strategist at Avantis Investors, suggests a diversified approach that goes beyond traditional index funds like the S&P 500. He believes that focusing on value-oriented investments can lead to better long-term returns by emphasizing companies with low valuations and strong balance sheets.
Avantis’ U.S. Large Cap Value ETF (AVLV) follows the Russell 1000 Value index, but with a unique twist — the fund managers incorporate a profitability overlay when screening stocks. This strategy allows them to identify companies that are not only attractively priced but also have strong profitability metrics. McInnis explains, “We’re going to be less concentrated, so we are kind of making a lot of smaller bets on these lower valuation, better profitability [companies], paying off through time.”
After top holdings like Apple and Meta, the Large Cap Value fund’s portfolio includes companies like JPMorgan, Costco, and Exxon Mobil, according to FactSet data. The fund’s sector weightings are diversified, with financial services and retail making up approximately 15% each, and energy accounting for nearly 12%. McInnis emphasizes the importance of managing sector exposures to prevent over-concentration and reduce risk, stating, “Starting at the company level and the sectors being a byproduct, we do have caps with the sectors to make sure that those bets aren’t too big, that we aren’t too concentrated in an individual sector.”
As of the latest market close, Avantis’ Large Cap Value ETF has delivered a return of 7.7% in 2024, outperforming the Russell 1000 Value index, which gained 4.5% over the same period. This performance highlights the potential benefits of a value-oriented investment strategy that prioritizes companies with strong fundamentals and attractive valuations. With a focus on diversification and profitability, investors may be able to achieve better long-term returns while managing concentration risk in their portfolios.
Overall, the shift towards value-oriented investments like Avantis’ Large Cap Value ETF presents an intriguing opportunity for investors looking to enhance their portfolios with a more diversified and strategic approach to stock selection. By considering factors beyond simple valuations, such as profitability and sector exposures, investors can potentially improve their risk-adjusted returns and achieve greater stability in ever-evolving market conditions.