Investors may avoid market concentration risk with this ETF strategy

In a market where investors are worried about concentration risk, it may be beneficial to consider value-oriented investments. Avantis Investors chief investment strategist, Phil McInnis, suggests a more diversified approach compared to just relying on index funds like the S&P 500. He believes that his firm’s exchange-traded fund strategy can offer superior returns in the long run by focusing on companies with low valuations and strong balance sheets. The U.S. Large Cap Value ETF (AVLV) by Avantis tracks the Russell 1000 Value index but with an additional profitability overlay in stock screening.

McInnis emphasizes that Avantis’ approach to value investing is less concentrated compared to traditional passive instruments. By making smaller bets on companies with lower valuations and better profitability, the strategy aims to pay off over time. Along with top holdings like Apple and Meta, the AVLV fund includes JPMorgan, Costco, and Exxon Mobil, reflecting a diversified portfolio across various sectors. The fund’s sector weightings are well-distributed, with financial services and retail making up roughly 15% each, followed by energy at nearly 12%.

To prevent excessive concentration in any particular sector, Avantis applies caps at the sector level, ensuring a balanced allocation within the portfolio. This approach aims to mitigate risk while still offering exposure to value-oriented investments. The performance of Avantis’ Large Cap Value ETF has been impressive, with a 7.7% increase in 2024 as of the latest market close. In comparison, the Russell 1000 Value index gained only 4.5% during the same period, highlighting the potential benefits of a value-focused strategy.

Overall, investors concerned about concentration risk in the market may find value-oriented investments like the AVLV ETF appealing. By diversifying across companies with low valuations and strong balance sheets, investors can potentially mitigate risk while seeking returns in the long run. Avantis’ unique approach to value investing, focusing on profitability alongside traditional valuation metrics, offers a differentiated strategy compared to traditional passive instruments. With a well-diversified portfolio that includes top holdings from various sectors, the AVLV ETF provides exposure to value-oriented companies while maintaining sector-level caps to prevent overconcentration.