Beat the Market by Expanding Your Horizons: The Avantis Value ETF Strategy

Concerned about the overwhelming influence of a few tech giants on the stock market? You’re not alone. There’s a potential solution: value investing with a fresh perspective.

Diversification Beyond Traditional Index Funds

Instead of depending solely on traditional index funds like the S&P 500, Phil McInnis, Chief Investment Strategist at Avantis Investors, advocates for a more comprehensive strategy. He believes their unique exchange-traded fund (ETF) approach can yield superior long-term returns by concentrating on undervalued companies with solid financial health.

“Our strategy reduces concentration risk,” McInnis explained on CNBC’s “ETF Edge.” “We make smaller bets on a broader range of companies with lower valuations and higher profitability, aiming for these advantages to pay off over time.”

Avantis: Value Investing Enhanced with a Profitability Filter

The Avantis U.S. Large Cap Value ETF (AVLV) tracks the Russell 1000 Value index, but with an additional layer of scrutiny. Their fund managers go beyond the typical value definition, applying a “profitability overlay” to screen potential investments. This ensures they are not only purchasing undervalued stocks but also companies that are generating substantial profits.

“We identify attractively priced companies with a keen eye on profitability,” McInnis said. “This approach goes beyond what typical passive index funds do, which often rely on a single factor or a complex set of variables to define value versus growth.”

A Balanced Portfolio: Looking Beyond Tech Giants

While the fund includes companies like Apple and Meta, its top holdings also feature firms such as JPMorgan Chase, Costco, and Exxon Mobil. This reflects a more balanced sector allocation, with financials and retail each comprising about 15% of the portfolio, followed by energy at nearly 12%.

“We start by selecting companies with strong fundamentals,” McInnis explained. “The sector weightings result from these selections, not the other way around. We also cap our exposure to each sector to ensure we’re not overly concentrated in any one area.”

Promising Early Results

So far in 2024, the Avantis Large Cap Value ETF has shown promise, with a return of 7.7% as of Friday’s close. This performance surpasses the Russell 1000 Value index, which gained 4.5% over the same period.

For those looking to diversify their portfolio and potentially outperform the broader market, Avantis’ value-focused ETF with its profitability filter might be a compelling option. However, as with any investment, it’s essential to conduct your own research before making a decision.

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