(Bloomberg) -- A breakthrough in China shakes the US tech sector to its core. Tariff drama escalates with President Donald Trump vowing action against major trading partners. A hawkish Federal Reserve jars inflation-obsessed traders anew.
And yet despite all the volatility of late, the biggest equity benchmarks weathered much of the turbulence this week, providing another occasion for buy-and-hold advocates to claim victory. But the market whiplash is also empowering a motley crew of Wall Street issuers who spot a money-making opportunity — one that’s struggled to work for years.
They’re pushing investing tactics to defuse the market’s precarious dependence on a handful of giant multinational companies, including quant strategies that mute volatility and exchange-traded funds that simply discard the biggest constituents. From BlackRock Inc. to ProShares, issuers are promising to weaponize the ETF revolution to solve the conundrum of a concentrated stock market driven by Big Tech.
The pitch is timely. In a week that saw the S&P 500 and the Nasdaq 100 partly recover from AI-fueled fears, quant-investing strategies were notable winners, many of them serving to diversify away from a tech run-up that has added some $15 trillion to the value of Nasdaq 100 since the end of 2022. The low-volatility strategy rose to the top of some 13 factor styles tracked by Bloomberg, returning nearly 1.5% for the week, followed by trades tuned to dividend yields and short interest.
“Having the diversification across markets matters,” said Ayako Yoshioka, senior portfolio manager at Wealth Enhancement Group, which spread out factor-based allocations earlier this year. “We did not want to reduce our overall US equity exposure. But we wanted to change the mix. So we trimmed S&P 500 exposure and re-weighted that.”
In a market where technology megacaps have dominated stocks at a scale never seen before, fear of concentration is starting to run as high as fear of missing out. And the Wall Street product press is responding in kind.
Last year’s newly launched equity ETFs came with an average tech weight of 18%, data compiled by Bloomberg Intelligence show. That’s the lowest level since 2017. The Defiance Large Cap ex-Mag 7 ETF (ticker XMAG) has steadily amassed assets since its debut in October. Its launch was followed by BlackRock’s iShares Nasdaq-100 ex Top 30 ETF (QNXT), which plucks out the biggest companies from the tech-heavy gauge.
Another nod to easing megacap dominance: so-called smart-beta equity ETFs — most of them long only — took in $166 billion in 2024, with November and December seeing the two largest monthly hauls in at least seven years.
Of course, these allocations are a drop in the ocean, given the trillions that have flooded benchmark-hugging ETFs. And how you interpret a week like this one depends mostly on your prior investment convictions. The tentative market recovery may embolden the passive faithful who say — however crowded benchmarks are with tech — simply buying and holding the big benchmarks is a ticket to riches.
Market Cycles
Yet, US markets are appreciably jumpier than they were eight weeks ago. The S&P 500 has fallen more than 1% five times since the Fed’s Dec. 18 meeting, and average daily swings over the stretch are about a fifth bigger than in 2024. It’s one under-the-surface sign of investor anxiety.
“The market always has cycles,” said Michael Sapir, chief executive officer at Proshares, an ETF issuer that manages over $70 billion. “Issuers want to be prepared when the market cycle shifts.”
One of Sapir’s own funds that tracks S&P 500 companies except the tech sector (SPXT) has for 10 years languished with barely any inflows — until December. Traders injected $110 million in one month, half of its total assets today.
“We are getting a good number of inquiries about that fund because of concern over tech concentration,” he added. “What you never know is whether the downdraft is temporary or part of a larger trend.”
Another popular trade: Removing concentration risks altogether. Flows into roughly 120 equal-weighted ETFs surged in the last three months as investors move to spread out risk, according to calculations by BI’s Athanasios Psarofagis. These included Invesco Ltd.’s equal weight S&P 500 fund (RSP) — one that gives Target Corp. as much clout as Nvidia Corp. — which saw five straight months of inflows, the longest such stretch since early 2023.
Despite fears over Nvidia, once dubbed the world’s most important stock, the case for optimism was boosted by benign economic signals. Data Friday showed the Fed’s preferred inflation gauge matched estimates, even as it kept well above the central bank’s 2% target. Consumers are still spending, the labor market remains strong, and fears are receding that Chinese upstart DeepSeek will upend the nation’s artificial intelligence dominance.
Regardless, a cohort of investors are broadening their portfolios in favor of less-expensive shares. They poured billions of dollars into financial and consumer discretionary ETFs combined. The latter saw a record monthly haul in January, according to Bloomberg data going back to 2018, a stark reversal from December.
To help money managers keep up with market returns while spreading out bets, firms like AQR Capital Management and Newfound Research have been pushing for leveraged products. These use borrowed money to wring out extra returns on top of allocations that track the index gains, a tactic known as portable alpha.
Over the past two years, Newfound and ReSolve Asset Management have launched a handful of ETFs with the idea rebranded as “return stacking.” Those funds, including one layering a merger-arbitrage strategy on top of bonds that debuted in December, have collected about $880 million in assets.
While Monday’s selloff was a good reminder of the potential turbulence on the horizon, the benefit of diversification normally manifests itself over the long run, according to Corey Hoffstein, chief investment officer of Newfound.
“Continued macro volatility will have investors continuing to evaluate how they want to build resilient portfolios,” he said. “Diversification isn’t meant to be a crisis or tail hedge: its benefits take time to compound.”
