As investors continue to navigate the current market landscape, concerns around concentration risk have been at the forefront. In such times, looking beyond traditional index funds like the S&P 500 could be the key to achieving better returns in the long run. According to Phil McInnis, the chief investment strategist at Avantis Investors, a more diversified approach through value-oriented investments might be the way forward.
At the core of Avantis’ investment strategy lies a focus on companies with low valuations and strong balance sheets. McInnis believes that by opting for a value-oriented approach, investors can potentially mitigate risks associated with high concentration in certain sectors or assets. This strategy involves making smaller bets on undervalued companies that have the potential for better profitability over time.
One of the investment options offered by Avantis is the U.S. Large Cap Value ETF (AVLV), which tracks the Russell 1000 Value index. However, what sets this ETF apart is the profitability overlay used by fund managers to screen stocks. By incorporating profitability metrics into the selection process, Avantis aims to surpass the limitations of traditional passive instruments that categorize companies solely based on their value or growth potential.
Looking at the composition of the Large Cap Value fund, investors will find familiar names like Apple, Meta, JPMorgan, Costco, and Exxon Mobil among its top holdings. With financial services and retail sectors comprising approximately 15% each of the portfolio, and energy holding nearly 12%, Avantis ensures diversification by capping sector allocations. This proactive approach prevents overexposure to any single sector, thereby reducing concentration risk.
In terms of performance, Avantis’ Large Cap Value ETF has demonstrated strong returns, with a 7.7% increase in 2024 as of the latest market close. In comparison, the Russell 1000 Value index gained 4.5% during the same period. This outperformance underscores the effectiveness of Avantis’ value-oriented investment strategy in generating favorable returns for investors.
For investors seeking a more diversified approach to managing market concentration risk and potentially enhancing their returns, exploring value-oriented investment options such as Avantis’ offerings could prove beneficial. By focusing on companies with low valuations, strong profitability, and a balanced sector allocation, investors can navigate market uncertainties with a well-rounded investment strategy.