The current economic landscape highlights the growing uncertainty that investors are facing. From the ongoing sell-off in tech stocks amid AI bubble concerns, to persistent geopolitical frictions, trade disputes and increasing inflation expectations, diversification has become essential for investors looking to protect and balance their portfolio.
The S&P 500’s performance in August highlights both market volatility and underlying investor anxiety. After initially gaining 3.7% in the month, the broad market index lost momentum by the second week, declining about 1.5% on Aug. 21.
Underlying market risks make it necessary for investors to diversify. Long-term investors should consider broadening their exposure. This will enable them to preserve their growth potential while reducing vulnerability to market shocks that arise from overconcentration.
AI Hype Hits the Brakes
The S&P 500 Information Technology Index mirrors the performance of the S&P 500 index in August, gaining 5.2% initially and declining 3.8% from the second week onward. A growing number of investors now believe that gains in the AI sector may have become overextended.
According to Reuters, funds are moving away from the tech sector as investors seek to de-risk portfolios and lock in profits amid volatility.
Rising concerns about the sustainability of the AI boom, coupled with comments from OpenAI CEO Sam Altman, prompted investors to rotate out of some of the biggest tech players, highlighting the sector’s concentration risk and potential systemic vulnerabilities.
According to Yahoo Finance, a report by researchers for MIT’s Project NANDA, found that 95% of companies studied are seeing no returns from AI. Additionally, as quoted on Yahoo Finance, Altman commented that he believes there may be an AI bubble, marking a notable shift from his previous statements and adding to the cautious mood.
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.
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 6.09% year to date and 3.56% month to date.
Investors can consider Consumer Staples Select Sector SPDR Fund XLP, Vanguard Consumer Staples ETF VDC and iShares U.S. Consumer Staples ETF IYK.
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, gold remains a secure choice amid economic and geopolitical instability.
International Equity ETFs
If your portfolio is largely invested in ETFs tracking broad U.S. market indexes such as the S&P 500, you are, directly or indirectly, heavily exposed to the information technology sector, particularly in the “Magnificent 7” tech leaders. The S&P 500 allocates roughly 34% to information technology.
To balance this tilt, adding international equity ETFs can broaden geographical exposure and strengthen overall diversification. Additionally, investing in international equity ETFs could also potentially boost risk-adjusted returns.
Investors can also consider funds such as Dimensional International Core Equity Market ETF DFAI and Avantis International Equity ETF AVDE.
Investors willing to take on slightly more risk can increase their exposure to emerging market ETFs, unlocking the potential for higher returns.
Investors can look into funds like iShares Core MSCI Emerging Markets ETF IEMG and Vanguard FTSE Emerging Markets ETF VWO.
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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
iShares Core MSCI Emerging Markets ETF (IEMG): ETF Research Reports
Vanguard Consumer Staples ETF (VDC): ETF Research Reports
Vanguard FTSE Emerging Markets ETF (VWO): ETF Research Reports
iShares U.S. Consumer Staples ETF (IYK): ETF Research Reports
iShares Russell 1000 Value ETF (IWD): ETF Research Reports
iShares S&P 500 Value ETF (IVE): ETF Research Reports
SPDR Gold MiniShares Trust (GLDM): 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).
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