Avoid concentration risk with this value play, ETF expert suggests

Investors concerned about concentration risk in the market may want to consider value-oriented investments.

Avantis Investors chief investment strategist Phil McInnis suggests taking a more diversified approach than simply looking at index funds like the S&P500. He thinks his company’s exchange-traded fund strategy can deliver better returns over the long term, focusing on companies with low valuations and strong balance sheets.

“We will be less focused,” he told CNBC’s “ETF Edge” this week. “So we’re making much smaller bets on this lower valuation and better profitability [companies] pays for itself over time.”

Avantis’ US Large Cap Value ETF (AVLV) tracks the Russell 1000 Value index, but with a caveat: the fund managers screen stocks using a profitability overlay.

“As we sift through and identify the companies that are trading at more attractive prices, we do so while looking at the profits,” McInnis said. “That goes beyond the typical kind of passive instruments that exist that define value versus growth based on a single variable or a whole compendium of variables.”

After Apple And Metathe second largest investments of the Large Cap Value fund JPMorgan, Costco And ExxonMobil, according to FactSet. Financial services and retail are the main sector weights, each making up around 15% of the portfolio, while energy comes in third with almost 12%.

“Starting at the company level and the sectors as a byproduct, we have limits on the sectors to ensure that those bets are not too big, that we are not too concentrated in any individual sector,” McInnis added.

Avantis’ Large Cap Value ETF is up 7.7% for 2024, as of Friday’s market close. The Russell 1000 Value Index rose 4.5% over the same period.

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