American Century’s Testani on How to Beat Concentration Risk

This week’s Investment Company Institute (ICI) saw industry leaders come together to take on all sorts of topics before the ETF industry, including how to navigate one of the biggest ongoing risks to portfolios, concentration risk. VettaFi recently connected with American Century Investments’ Head of ETF Product and Strategy Sandra Testani to discuss ETF strategies that can limit that risk.

Key Takeaways:

• QGRO’s 3.5% cap for individual security weights can help the fund address concentration risk.
• The quality growth ETF’s approach, emphasizing factors like income, cash, and other fundamental metrics, can help it find durable names outside of the megacap firms.
• The ETF has returned almost 20% over the last three years, according to ETF database data.

The ETF wrapper has allowed significant investment strategy innovation over the years. With its transparency, tax efficiency, and tradability, it has become a powerful portfolio building block. The American Century U.S. Quality Growth ETF (QGRO) provides a powerful example.

QGRO takes on concentration risk with its focus on quality firms. The quality growth ETF’s index screens stocks for factors like quality, income, and growth. It looks to combine a mix of stable growers and high-growth stocks. Those traits come together in a portfolio that offers growth with reduced volatility and risk. 

More Thought Leadership: American Century’s Greenblath Talks Spring Corporate Bond Shifts

“Unlike traditional market-cap-weighted indexes — where the top 10 holdings can make up an outsized portion of the fund — QGRO applies a fundamental lens and caps individual security weights at 3.5%,” Testani said. 

Moreover, she explained, while the fund may lag when those megacaps explode, it offers “strong downside protection,” acting as ballast if those stocks tumble. That also speaks to its merits regarding concentration risk. 

The strategy has returned 19.6% over the last three years with that approach. That performance has seen the ETF outperform the ETF Database Large Cap Growth Equities Category average in that time. Charging a 29 basis point fee, the strategy could prove a solid core-plus addition for investors to consider.

For more news, information, and strategy, visit the Core Strategies Content Hub.

VettaFi LLC (“VettaFi”) is the index provider for QGRO, for which it receives an index licensing fee. However, QGRO is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of QGRO.

Earn free CE credits and discover new strategies