If investors have concerns about concentration risk in the market, they may find value-oriented investments worth considering.
According to Avantis Investors’ chief investment strategist, Phil McInnis, it is advisable to adopt a more diversified approach rather than solely relying on index funds like the S&P 500. He believes that his firm’s exchange-traded fund strategy has the potential to deliver superior long-term returns, focusing on companies with attractive valuations and robust balance sheets.
He mentioned to CNBC’s “ETF Edge” this week that there will be a decrease in concentration. “We are strategically diversifying our investments by focusing on smaller companies with lower valuations and higher profitability. This approach allows us to make calculated bets that have the potential to yield significant returns over time.”
Avantis’ U.S. Large Cap Value ETF (AVLV) follows the Russell 1000 Value index, but with an interesting twist: the fund managers employ a profitability overlay to screen stocks.
“While evaluating companies with potential for better returns, we carefully consider their profitability,” McInnis explained. That extends beyond the usual passive instruments available that define value versus growth based on a single variable or a comprehensive set of variables.
According to FactSet, in addition to Apple and Meta, the Large Cap Value fund’s top holdings also include JPMorgan, Costco, and Exxon Mobil. The portfolio is primarily composed of financial services and retail, each accounting for approximately 15% of the total. Energy follows closely behind, making up nearly 12% of the portfolio.
McInnis emphasised the importance of maintaining a balanced portfolio by setting limits on sector investments. This ensures that the company doesn’t become overly focused on any one sector, mitigating potential risks.
Avantis’ Large Cap Value ETF has seen a 7.7% increase in 2024, as of the market close on Friday. During the same period, the Russell 1000 Value Index experienced a 4.5% gain.
Source : CNBC News
