This ETF strategy may help investors skirt market concentration risk

Investors worried 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 such as the S&P 500. He thinks his firm’s exchange-traded fund strategy can provide better returns in the long run, emphasizing companies with low valuations and strong balance sheets.

“We’re going to be less concentrated,” he told CNBC’s “ETF Edge” this week. “So we are kind of making a lot of smaller bets on these lower valuation, better profitability [companies] paying off through time.”

Avantis’ U.S. 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’re sifting through and identifying those companies that are trading at more attractive prices, we’re doing so while looking at the profits,” McInnis said. “That goes beyond the typical kind of passive instruments that are out there that are making a definition of value versus growth on a single variable or a whole compendium of variables.”

After Apple and Meta, the Large Cap Value fund’s next-largest holdings are JPMorgan, Costco and Exxon Mobil, according to FactSet. Financial services and retail are the top sector weightings, each comprising roughly 15% of the portfolio, with energy coming in third at nearly 12%.

“Starting at the company level and the sectors being a byproduct, we do have caps with the sectors to make sure that those bets aren’t too big, that we aren’t too concentrated in an individual sector,” McInnis added.

Avantis’ Large Cap Value ETF is up 7.7% in 2024, as of Friday’s market close. The Russell 1000 Value index gained 4.5% during the same period.


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