Investors concerned about concentration risk in the market may consider value-oriented investments as a way to diversify their portfolios. Phil McInnis, chief investment strategist at Avantis Investors, recommends a more diversified approach than just investing in index funds like the S&P 500. He believes that his firm’s exchange-traded fund strategy can offer better long-term returns by focusing on companies with low valuations and strong balance sheets. This strategy aims to make smaller bets on lower valuation, higher profitability companies that can pay off over time.
Avantis’ U.S. Large Cap Value ETF (AVLV) tracks the Russell 1000 Value index but with an additional profitability overlay where fund managers screen stocks based on profits. This goes beyond traditional passive instruments that define value vs. growth based on single or multiple variables. The fund’s top holdings, after Apple and Meta, include JPMorgan, Costco, and Exxon Mobil. Financial services and retail make up about 15% each of the portfolio, with energy at nearly 12%. Avantis also caps sector weightings to prevent over-concentration in any one sector.
McInnis emphasizes taking a company-level approach with sectors as a byproduct to avoid undue concentration in a single sector. This approach helps ensure that investments are spread out across different industries for better risk management. Avantis’ Large Cap Value ETF has gained 7.7% in 2024, outperforming the Russell 1000 Value index, which gained 4.5% during the same period. The fund’s focus on low valuation, high profitability companies, and sector diversification has contributed to its strong performance despite market volatility.
Investors looking to mitigate concentration risk may find value-oriented investments like Avantis’ Large Cap Value ETF appealing. By focusing on companies with low valuations and strong balance sheets, the fund offers a more diversified approach compared to traditional index funds. The profitability overlay used by Avantis helps to identify companies trading at attractive prices while considering their profitability. This strategy allows investors to make smaller bets on companies that have the potential to generate returns over time.
Avantis’ Large Cap Value ETF has a diversified portfolio with top holdings in a variety of sectors including financial services, retail, and energy. The fund’s sector weightings are capped to prevent over-concentration in any one industry, further reducing risk. By taking a company-level approach to investing and diversifying across sectors, the fund aims to provide investors with a more balanced and resilient portfolio. This approach has proven successful, with the fund outperforming the Russell 1000 Value index in 2024.
In conclusion, value-oriented investments like Avantis’ Large Cap Value ETF offer investors a way to diversify their portfolios and mitigate concentration risk in the market. By focusing on companies with low valuations, strong balance sheets, and profitability, the fund provides a more balanced approach to investing compared to traditional index funds. With a diversified portfolio and capped sector weightings, investors can feel more confident in their investments and potentially achieve better long-term returns.
