Avoid concentration risk with this value play, ETF expert suggests

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A new method for measuring performance in two lagging sectors

Investors concerned about concentration risk in the market should consider value-oriented investments.

Phil McInnis, chief investment strategist at Avantis Investors, suggests a more diversified approach than just looking at index funds like the S&P500He believes his firm's exchange-traded fund strategy can generate better returns over the long term by favoring 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're making a lot of smaller bets on these lower-rated, better-return funds. [companies] pays off over time.”

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

“When we filter out and identify the companies that are trading at more attractive prices, we look at earnings,” McInnis said. “This goes beyond the typical passive instruments that define value versus growth based on a single variable or a whole compendium of variables.”

After Apple And MetaThe next largest holdings of the Large Cap Value Fund are JPMorgan Chase & Co., Costco And ExxonMobilaccording to FactSet. Financial services and retail are the sectors with the highest weighting, each accounting for about 15% of the portfolio, with energy in third place at almost 12%.

“Because we start at the company level and the sectors are a byproduct, we have set caps on the sectors to make sure these bets are not too big and we don’t get too focused on any single sector,” McInnis added.

Avantis' Large Cap Value ETF is up 7.7% in 2024 through Friday's close. The Russell 1000 Value Index is up 4.5% over the same period.

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