In a market where concentration risk is a growing concern for investors, the traditional approach of solely relying on index funds like the S&P 500 may not be the best strategy. Phil McInnis, the chief investment strategist at Avantis Investors, advocates for a more diversified approach that focuses on value-oriented investments. By shifting the focus towards companies with low valuations and strong balance sheets, investors can potentially achieve better long-term returns.
At Avantis, the emphasis is on a unique exchange-traded fund (ETF) strategy that goes beyond simply tracking the Russell 1000 Value index. The Avantis U.S. Large Cap Value ETF (AVLV) incorporates a profitability overlay when screening stocks, ensuring that investments are not solely based on valuation metrics. This approach sets it apart from traditional passive instruments and provides a more nuanced view of value investing.
One of the key differences in Avantis’ strategy is the emphasis on diversification at both the company and sector level. By avoiding over-concentration in individual stocks or sectors, the risk of significant losses is mitigated. This approach allows for a balanced distribution of investments across different sectors, with financial services and retail making up the top sector weightings in the portfolio.
Despite the market turbulence, Avantis’ Large Cap Value ETF has delivered a solid performance, with a 7.7% gain in 2024. This outpaced the Russell 1000 Value index, which saw a 4.5% increase during the same period. With holdings in companies like JPMorgan, Costco, and Exxon Mobil, the fund remains well-positioned to capitalize on the potential upside of companies with strong fundamentals and attractive valuations.
In a market environment where concentration risk looms large, adopting a diversified investment approach is crucial. By considering value-oriented investments like the Avantis U.S. Large Cap Value ETF, investors can potentially enhance their long-term returns while mitigating the risks associated with concentrated holdings. With a focus on profitability, strong balance sheets, and sector diversification, Avantis offers a compelling alternative to traditional index funds.