The current market landscape is dominated by a handful of names. The Mag 7 now accounts for a historically large portion of the S&P 500’s total market capitalization. Last week, NVIDIA NVDA shares surged, briefly pushing its market cap above $4 trillion for the first time. This highlighted growing investor and market enthusiasm surrounding the AI sector.
The accelerating momentum behind the AI and tech rally is powering much of the broader market’s gains. This is evident from the performance of the S&P 500 Information Technology Index, which has gained 9.44% year to date.
However, investing heavily in the technology sector to capitalize on AI’s growth potential comes with increased concentration risk and systemic risk.
Underlying market risks make it necessary for investors to diversify. Long-term investors should consider broadening their exposure, not by abandoning the tech sector altogether but by complementing it with diversified holdings. This will enable them to preserve their growth potential while reducing vulnerability to market shocks that arise from overconcentration.
What’s Making Markets Vulnerable
Renewed trade tensions are casting a cloud of uncertainty over global markets. According to Yahoo Finance, President Trump unexpectedly announced on Saturday that the United States will impose 30% tariffs on imports from the EU and Mexico, effective August 1, turning investor sentiment downbeat.
This further escalates global trade tensions, creating a more uncertain economic landscape and further fueling inflationary pressures. The U.S economy faces headwinds due to inflationary pressure, intensified by the tariffs proposed by the President.
Concerns over U.S. debt levels, coupled with leadership and political uncertainty of the Fed, dent investor confidence. A possible Fed leadership shake-up remains a significant source of investor unease.
ETFs to Consider
Preserving capital and cushioning volatility is key for investors looking to navigate a volatile period ahead. Reducing concentration risk by diversifying into ETFs that focus on value sectors or equal-weighted strategies can enhance resilience while still capturing upside potential.
Diversification remains one of the most effective strategies for building resilient portfolios, especially in a market driven by a few dominant players. Below, we highlight a few areas in which investors can increase their exposure.
Investing in these sectors not only shields portfolios from downside risks and safeguards investments during market distress but also offers gains when the broader market trends improve. These sectors provide dual benefits, protecting portfolios during market downturns and offering gains when the market rises.
Value ETFs
Vanguard Value ETF VTV, iShares Russell 1000 Value ETF IWD and iShares S&P 500 Value ETF IVE, having a Zacks ETF Rank #1 (Strong Buy) or 2 (Buy), could be appealing options. Characterized by solid fundamentals, such as earnings, dividends, book value and cash flow, these stocks trade below their intrinsic value, representing undervaluation.
Gold ETFs
Investors can also consider funds such as SPDR Gold Shares GLD, iShares Gold Trust IAU and SPDR Gold MiniShares Trust GLDM, increasing their exposure to the yellow metal. Across extended investment periods, gold preserves its purchasing power, outpacing inflation.
Additionally, a safe-haven investment during a challenging period, gold remains a secure choice amid economic and geopolitical instability.
Equal-Weighted ETFs
These funds offer sector-level diversification by assigning equal weight to each constituent stock, regardless of market capitalization, reducing concentration risk. This makes them a relevant choice for investors seeking diversified exposure across sectors.
Invesco S&P 500 Equal Weight ETF RSP, ALPS Equal Sector Weight ETF EQL and Invesco S&P 100 Equal Weight ETF EQWL are some good options.
Consumer Staple ETFs
Increasing exposure to consumer staple funds can bring balance and stability to investors’ portfolios. Investors can put more money in consumer staples funds to safeguard themselves from potential market downturns. The S&P 500 Consumer Staples Index has gained 5.88% year to date and 10.30% over the past year.
Investors can consider Consumer Staples Select Sector SPDR Fund XLP, Vanguard Consumer Staples ETF VDC and iShares U.S. Consumer Staples ETF IYK.
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NVIDIA Corporation (NVDA): Free Stock Analysis Report
SPDR Gold Shares (GLD): ETF Research Reports
iShares Gold Trust (IAU): ETF Research Reports
Consumer Staples Select Sector SPDR ETF (XLP): ETF Research Reports
Vanguard Value ETF (VTV): ETF Research Reports
Invesco S&P 500 Equal Weight ETF (RSP): ETF Research Reports
Vanguard Consumer Staples ETF (VDC): ETF Research Reports
iShares U.S. Consumer Staples ETF (IYK): ETF Research Reports
Invesco S&P 100 Equal Weight ETF (EQWL): ETF Research Reports
iShares Russell 1000 Value ETF (IWD): ETF Research Reports
iShares S&P 500 Value ETF (IVE): ETF Research Reports
ALPS Equal Sector Weight ETF (EQL): ETF Research Reports
SPDR Gold MiniShares Trust (GLDM): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).
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