One of the most valued attributes of ETFs is diversification. Rather than attempting to choose a couple of winning stocks, these equity funds own more securities. This should allow risk to be spread around. For many advisors and investors, ETFs tied to the S&P 500, or the Russell 1000, indices are how they gain U.S. equity exposure. However, others that want to try to outperform can still gain some diversification benefits using concentrated ETFs.
These best ideas portfolios tend to own less than 50 stocks, with some less than 25. Often, some favored stocks will represent more than 10% of the portfolio.
American Century’s Active ETF Having Success in 2024
For example, the American Century Focused Growth ETF (FDG ) recently had 37 positions, with NVIDIA and Amazon.com representing 17% and 10% of assets, respectively. However, the fund’s top-10 holdings recently also included Chipotle, Intuitive Surgical, and Regeneron Pharmaceuticals. Management’s bottom-up investment process seeks to uncover companies with durable competitive advantages believed to offer opportunities for higher and sustained growth.
In 2024, the approach has been working. FDG rose 23% year-to-date through July 31, outpacing 18% gain for the iShares Russell 1000 Growth ETF (IWF ).
Another concentrated active fund that has outperformed in 2024 is the Natixis Loomis Sayles Focused Growth ETF (LSGR ). As of July 29, LSGR was up 20%, edging out IWF. LSGR uses a seven-step investment process. This includes seeking companies with sustainable competitive advantages and balance sheet strength.
NVIDIA recently comprised 14% of LSGR assets and the fund had a large 9% stake in Alphabet and Meta Platforms. However, the top-10 also included less widely held stocks like Autodesk and Vertex Pharmaceuticals.
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It’s Not All About NVIDIA
Not all concentrated equity ETFs remain heavily focused on NVIDIA. Indeed, the Touchstone US Large Cap Focused ETF (LCF ) had a 2.5% position in the semiconductor company among its 48 positions. Microsoft and Apple were 9% and 7%, respectively, of the ETF as of late July. Other top-10 positions were Berkshire Hathaway and Goldman Sachs.
Unlike FDG and LSGR, LCF takes more of a balanced equity approach and uses the S&P 500 as its benchmark. However, year-to-date through July 31, LCF’s 14% gain lagged the 17% for the iShares Core S&P 500 ETF (IVV ).
BlackRock Recently Brought Out a Best Ideas Portfolio
In June 2024, the BlackRock Long-Term US Equity ETF (BELT ) launched. BlackRock has increasingly brought some of its well-established equity and fixed income managers into the ETF market. The firm no longer is focused solely on index ETFs like IVV and IWF.
BELT owns just 21 positions, but surprisingly NVIDIA is not one of them. The ETF recently had a 14% stake in Microsoft but also top-10 positions in Cadence Design, S&P Global and Trane Technologies.
Like LCF, BELT uses the S&P 500 Index as its benchmark. The concentrated portfolio of primarily U.S. equity securities is selected for their long-term growth outlook, including fundamentals, franchise strength, and reinvestment opportunity.
Taking a concentrated approach to equity investing can be helpful and is likely to appeal to those that believe in securities selection. But it’s important to look inside the fund.
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