A single session last Thursday took $2.5trn off the Nasdaq Composite, with $5.8trn coming off the US index since 6 October. Chipmakers took the worst of it: the Philadelphia semiconductor index fell 12% in a day after already dropping 22% in the month before. Whatever markets do this week, investors are asking how to own less of what keeps falling.
Many hold more in technology than they realise. The US makes up 73% of the MSCI World, the benchmark for global stock markets, up from half 15 years ago. Technology is 31.8% of the index, rising to 37.5% once Alphabet and Meta, which MSCI classes as communication services, are added back in. A global tracker fund, which simply copies that index, is a large tech bet by default.
For Oliver Brown, investment director at RC Brown, now is “a sensible time to diversify away from areas that have performed particularly well but now look expensive – notably US technology stocks”.
But before investors rip up their asset allocation strategy, it’s worth stopping and taking a breath, according to Benjamin Newton, investment manager at Credo, who said: “Provided the portfolio is appropriate and reasonably balanced, don’t make dramatic changes in the middle of a sell-off. That’s rarely when the best investment decisions are made.”
If, with a cool head, it still makes sense to have a rethink of your portfolio, there are a plethora of options available.
Spreading your bets
In an equal-weighted index, every company is held at the same size instead of by market value, so the biggest names stop dominating and bets are more evenly spread.
“Equal weight gives you more diversification and naturally increases your exposure to areas such as industrials, financials and healthcare. The obvious trade-off is that if mega-cap tech comes roaring back, you’re likely to lag,” Newton said.
Dan Coatsworth, head of markets at AJ Bell, suggested the Invesco MSCI World Equal Weight ETF, which resets every member of the index to the same weight once a quarter. The US was 40.6% of it at the end of September.
“It would mean the investor still has their toe in the pond for US tech exposure, but they wouldn’t be up to their neck in the water,” he said.
Equal weighting, however, carries costs of its own, as Andrius Makin, associate portfolio director at Killik, noted.
“Although an equal-weight fund reduces concentration risk, investors should be aware that they are effectively taking on a tilt towards mid-caps. Maintaining the equal weights also requires regularly reducing stocks that are performing well in favour of those that are lagging, which also incurs higher transaction costs,” he said.
Bye bye America
Another option is actively avoiding the US, which is the cheapest way to cut tech, Coatsworth said, pointing to the iShares MSCI World ex-US ETF, where technology is 10.9% of the portfolio, financials 27.9% and industrials 17.6%.
Banks, healthcare companies, oil producers and miners dominate the index, with Nvidia and the other leaders of the US rally dropping out.
Makin agreed that an ex-US fund provides a cheaper entry point from a valuation perspective, with more exposure to cyclicals and less dollar concentration.
But he warned excluding the US will still leave exposure to AI through Asian and emerging-market companies.
Newton wasn’t ready to part from the US.
“Ex-US is a much bigger call [than equal weight]. You’re effectively cutting out the world’s largest equity market because you’re worried about one part of it. I think that risks throwing the baby out with the bathwater,” he said.
Choose your fighter
Investors who already hold a global tracker could add an active global fund, with a real person who makes decisions, instead of passively following an index. This was Brown’s suggestion, as he considered equal-weight and ex-US options too narrow a fix.
His choice was to trim the tracker and move around 20% into active funds, in two or three stages.
RC Brown selects managers with strict valuation rules, with examples being the Latitude Global fund, which has a value bias but keeps around 50% in US equities, and the IFSL Meon Adaptive Growth fund, which leans towards growth but has largely avoided the US tech names.
Meon has lagged this year, yet Brown said its “stellar performance in 2024 illustrates how the manager’s distinct process has the ability to deliver outsized returns”.
But hiring a stock picker comes with a catch, Newton added.
“An active global fund with less tech can absolutely work, but you’re introducing manager risk. You need the manager to deliver the diversification you’re looking for rather than simply owning the same AI theme through a different set of stocks.”
To mitigate this, he would add the new holding alongside the tracker rather than swap, sized at 10% to 20% of the existing global equity allocation. He would also feed the money in over a few months.
“The danger after a sell-off is that you decide you want less exposure to yesterday’s winners just after they’ve already fallen sharply. You can then get caught if they rebound.”
Small fry
Makin preferred to allocate to smaller US companies held through a global index fund. Measured by share price against profits, this area of the market can be bought at a wide valuation gap relative to large companies.
He said: “That provides a decent margin of safety. It is worth bearing in mind that smaller companies will leave you more exposed to any tightening in economic conditions, so keep the allocation sensible.”
He also liked the ‘HALO’ theme, which covers companies with ‘heavy assets and low obsolescence’, meaning less exposure to AI disruption. Typical sectors are industrials and utilities. The SPDR S&P U.S. Dividend Aristocrats UCITS ETF holds firms that have raised their dividends for at least 20 consecutive years, with each position capped at 4%.
“I like that these businesses have demonstrated effective capital allocation through a variety of market environments including the global financial crisis and the Covid pandemic,” he said.
Go big… or go home
Susannah Streeter, chief investment strategist at Wealth Club, looked beyond tracker swaps. Utilities, healthcare, consumer staples and reliable dividend payers, she said, tend to hold up better when conditions are unsettled.
She also saw a case at home: “Some UK technology businesses are operating at considerably lower valuations than their US counterparts. That could make them attractive to investors looking for the next wave of AI growth, rather than simply chasing the mega-cap technology companies.”