The sharp pullback in technology names has raised caution among market participants. Stocks retreated on Wednesday as weakness in global tech shares weighed on the market and dented investor sentiment.
Earlier, on Nov. 4, the Nasdaq Composite dropped nearly 2%, while the S&P 500 and the Dow Jones U.S. Technology Index fell about 1.2% and 2.4%, respectively, in a single trading session. The spike in volatility was also reflected in the CBOE Volatility Index, which surged roughly 12% on Nov. 4, signaling heightened volatility and mounting investor nervousness over the possibility of an AI bubble.
According to Yahoo Finance, U.S. stock futures were under pressure on Wednesday after a deep selloff in the previous session. With valuations surging, investors are becoming uneasy that the AI-driven rally may have detached from fundamentals, raising fresh bubble concerns.
Per CNBC, the market’s AI frenzy is starting to collide with reality, with the stress fractures becoming visible. From CEOs cautioning that a correction may be on the horizon to concerns over massive AI capex outpacing revenue growth, the tunnel vision in markets is becoming hard to ignore. It might be time for investors to widen their lens beyond AI before the next shakeout hits.
Investing heavily in the technology sector to capitalize on AI’s growth potential comes with increased concentration and systemic risk, making it necessary for investors to diversify.
With valuations elevated and fears of an AI-driven bubble growing, investors now have even stronger reasons to diversify beyond concentrated equity exposure. 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.
Another factor dragging markets lower in recent sessions has been growing worries around equity valuations. U.S. stocks ended sharply lower on Tuesday after warnings from major banks reignited fears that stretched valuations could lead to a near-term pullback.
According to Reuters, Morgan Stanley and Goldman Sachs CEOs sounded alarms over a potential market bubble, which led to major U.S. stock indexes ending Tuesday’s trading session in red, with both the S&P 500 and Nasdaq recording their steepest one-day drops since Oct. 10. Their comments come after the S&P 500 hit multiple all-time highs, fueled largely by the AI boom.
Per the abovementioned Reuters article, last month, JPMorgan CEO Jamie Dimon cautioned that the risk of a major stock market correction has risen, potentially within the next six months to two years, driven by heightened geopolitical risks.
Additionally, with the government shutdown becoming the longest in U.S. history, fading expectations of a December rate cut and uncertainty over whether the U.S.–China truce can hold, investors may grow increasingly uneasy about the potential for heightened volatility ahead.
The AI momentum might continue to drive market gains, but the risk of concentrated rallies in select names makes the market vulnerable to larger drawdowns, requiring portfolio diversification. Diversification remains one of the most effective strategies for building resilient portfolios.
Reducing concentration risk by diversifying into ETFs that focus on value sectors or equal-weighted strategies can enhance resilience while still capturing upside potential. Below, we highlight a few areas in which investors can increase their exposure. These sectors provide dual benefits, protecting portfolios during market downturns and offering gains when the market rises.
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. The S&P 500 Equal Weight Index has gained 6.86% year to date.
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.
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.
Global stocks also declined in response to the weakness in U.S. markets. 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 36% 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.
The S&P World Index, which tracks the performance of stocks from 24 developed economies, has risen 18.60% over the past year and 17.95% year to date.
Investors can also consider funds such as Dimensional International Core Equity Market ETF DFAI and Avantis International Equity ETF AVDE.
Those 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
Invesco S&P 500 Equal Weight ETF (RSP): ETF Research Reports
iShares Core MSCI Emerging Markets ETF (IEMG): ETF Research Reports
Vanguard FTSE Emerging Markets ETF (VWO): ETF Research Reports
Invesco S&P 100 Equal Weight ETF (EQWL): ETF Research Reports
ALPS Equal Sector Weight ETF (EQL): 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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