For investors concerned about concentration risk in the market, value-oriented investments may offer a viable solution. According to Avantis Investors chief investment strategist Phil McInnis, opting for a more diversified approach beyond traditional index funds like the S&P 500 could be advantageous in the long run. By focusing on companies with low valuations and strong balance sheets, McInnis believes that better returns can be achieved over time. Emphasizing the importance of being less concentrated, he points out that making smaller bets on lower valuation, higher profitability companies can potentially pay off in the long term.
Avantis’ Approach to Value-Oriented Investing
Avantis’ U.S. Large Cap Value ETF (AVLV) tracks the Russell 1000 Value index, with a unique twist — the fund’s managers utilize a profitability overlay when screening stocks. This means that as the team identifies companies trading at attractive prices, they also consider the profitability of these firms. This approach sets Avantis apart from traditional passive instruments that typically define value and growth based on a single variable or a combination of variables. The fund’s top holdings, after Apple and Meta, include JPMorgan, Costco, and Exxon Mobil, highlighting a diversified mix of sectors and industries.
Portfolio Composition and Performance
Financial services and retail sectors dominate the portfolio, making up approximately 15% each, with energy following closely at nearly 12%. To mitigate sector-specific risks, McInnis mentions that the fund imposes caps on sector weights to prevent overconcentration. As a result, the fund’s performance has been promising, with the Large Cap Value ETF experiencing a 7.7% increase in 2024, outperforming the Russell 1000 Value index by 3.2%. This success underscores the benefits of a value-oriented, diversified approach to investing.
For investors seeking to combat concentration risk and potentially enhance long-term returns, value-oriented investments offer a compelling solution. By adopting a diversified strategy that focuses on companies with strong fundamentals and attractive valuations, investors can mitigate risks associated with sector concentration while striving for superior performance. Avantis’ innovative approach to value investing serves as a testament to the potential benefits of looking beyond traditional index funds and embracing a more nuanced investment strategy.