Among the many potential risks facing markets in 2024, concentration risk specifically remains a big one left over from this year. The so-called “Magnificent Seven” firms have definitely lifted the overall economy significantly, of course. However, that top-heavy performance poses a big risk should one or more of those firms take a hit next year. If just a few megacap tech firms are driving the bus, then an active investing approach could help mitigate that concentration risk and may be worth considering.
What about active investing can help navigate concentration risk? One way to do that, of course, would be to institute weighting schemes to prevent overexposures. Passive strategies can do that, but cannot adapt very quickly, requiring index resets that can be more intermittent. Active investing, instead, brings to bear the experienced of seasoned managers who can adapt more quickly.
For example, then, in a scenario in which those large tech firms do slow down amid lagging impacts from rate hikes this year, active investing can help. Not only does active investing bring to bear flexible weighting schemes, but active often also brings to bear fundamental analysis. That tight scrutiny of firms can help sift through companies that may finally start to crack from the high interest rate regime to find better opportunities.
In a strong year for active, then, active ETFs present a solid option looking ahead to the new year. Active strategies have picked up a significant amount of flows despite a relatively small amount of AUM. T. Rowe Price offers a variety of active strategies like the T. Rowe Price Capital Appreciation Equity ETF (TCAF ). For those investors looking to navigate concentration risks, active investing could provide one potent option.
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