The first week of February was marked by heightened volatility, reflecting the S&P 500’s choppy performance since the start of 2026. The benchmark index slid about 2.5% during the week, before rebounding roughly 2% in the final trading session.
U.S. software and data services stocks came under pressure late last week, extending losses amid fears that rapid AI advances could disrupt the sector. According to a Reuters article published last Thursday, the sell-off, dubbed “software-mageddon,” erased nearly $1 trillion in market value from Jan. 28, alongside a broader rotation away from technology stocks.
Additionally, Wall Street’s scrutiny of Big Tech’s AI spending has intensified, with investors responding negatively to signals of further capital expenditure expansion.
The S&P World Index, which tracks the performance of stocks from 24 developed economies, has gained 17.39% over the past year and 2.02% so far this year, outperforming the S&P 500 over both periods and highlighting that broadening exposure to global equities may be a compelling strategy.
The Case for Global Equity ETFs
Investors with portfolios concentrated in ETFs tracking major U.S. benchmarks like the S&P 500 are more exposed to the information technology sector than they might realize, particularly to the “Magnificent 7” tech giants. The S&P 500 allocates roughly 33% to information technology.
As investors look to scale back exposure to U.S. technology amid recent volatility, demand for U.S. equity funds eased in the week ended Feb. 4, pressured by a sell-off in software stocks, as per a Reuters article. According to LSEG Lipper data, as quoted on the abovementioned Reuters article, net inflows into U.S. equity funds totaled $5.58 billion during the week, marking a roughly 48% decline from the previous week’s $10.82 billion.
At the same time, global ex-U.S. equity funds attracted robust inflows as investors reallocated away from richly valued U.S. technology stocks toward more diversified and attractively valued international markets, amid rising U.S. macro risks and a softer dollar, according to another Reuters article. According to LSEG Lipper data, as quoted on the abovementioned Reuters article, global ex-U.S. equity funds drew $15.4 billion in January, their highest inflows in over four years, followed by $1.4 billion into ex-U.S. ETFs in early February.
A Softer Dollar Lends Tailwinds to Global Equity ETFs
A weakening U.S. dollar is also boosting interest in global equity funds. As capital flows rotate away from U.S. assets, demand for the greenback softens, putting downward pressure on the currency. Expectations of further Fed rate cuts in 2026 also add to the appeal of global equities.
Further rate cut expectations have been reinforced by Kevin Warsh’s nomination as Fed Chair, as he is widely seen as favoring lower interest rates alongside a leaner Federal Reserve balance sheet. The value of the greenback tends to move inversely with the Fed's interest rate adjustments.
According to TradingView, the U.S. Dollar Index (DXY) has fallen 1.65% over the past month and 9.67% over the past year. The index recorded an all-time decline of 18.86%.
ETFs to Explore
For investors seeking to reduce exposure to U.S. assets, international equity ETFs offer a practical solution. With ETFs offering diversification and tax efficiency, adding international equity ETFs can provide additional benefits of broadening geographical exposure and strengthening overall diversification. Investing in international equity ETFs could also potentially boost risk-adjusted returns.
International Equity ETFs
Investors can consider Schwab International Equity ETF SCHF, Schwab Fundamental International Equity ETF FNDF, Dimensional International Core Equity Market ETF DFAI and Avantis International Equity ETF AVDE.
International Dividend ETFs
Investors can also consider global dividend-focused funds. Dividend-paying securities serve as primary sources of reliable income for investors, particularly during periods of equity market volatility. Companies offering dividends often act as a hedge against economic uncertainty.
Investors can consider WisdomTree International Hedged Quality Dividend Growth Fund IHDG, Franklin International Low Volatility High Dividend Index ETF LVHI and iShares International Select Dividend ETF IDV, with dividend yields of 1.75%, 4.53% and 4.54%, respectively.
Emerging Market ETFs
Those willing to take on slightly more risk can increase their exposure to emerging market ETFs, unlocking the potential for higher returns. Adding emerging market equity ETFs can broaden geographic exposure while enhancing overall portfolio diversification. Those willing to take on a modest increase in risk may further tilt toward emerging market ETFs to unlock higher return potential.
The Dow Jones Emerging Markets Index has gained 25.19% over the past year and 4.68% so far this year. Below, we have highlighted some funds that investors can use to gain targeted exposure to emerging market economies.
Investors can look at funds like iShares Core MSCI Emerging Markets ETF IEMG, Vanguard FTSE Emerging Markets ETF VWO and iShares MSCI Emerging Markets ETF EEM.
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iShares MSCI Emerging Markets ETF (EEM): ETF Research Reports
iShares Core MSCI Emerging Markets ETF (IEMG): ETF Research Reports
Vanguard FTSE Emerging Markets ETF (VWO): ETF Research Reports
Franklin International Low Volatility High Dividend Index ETF (LVHI): ETF Research Reports
iShares International Select Dividend ETF (IDV): ETF Research Reports
Schwab International Equity ETF (SCHF): ETF Research Reports
WisdomTree International Hedged Quality Dividend Growth ETF (IHDG): ETF Research Reports
Schwab Fundamental International Equity ETF (FNDF): ETF Research Reports
Avantis International Equity ETF (AVDE): ETF Research Reports
Dimensional International Core Equity Market ETF (DFAI): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).
