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Following a period subjugated by the “Magnificent Seven” mega-cap tech stocks — similar to the dotcom bubble — investors are now looking beyond the big techs. Dan Draper, CEO at S&P Dow Jones Indices, indicated that a market shift is taking place and suggests that diversification into smaller stocks is a “free lunch” for long-term investors as market trends evolve, as quoted on CNBC.
The Appeal of Equal-Weight Indices
Draper also indicated that there is a growing interest in equal-weight indices, which provide balanced exposure to all stocks, regardless of size. Equal-weight indices, which allocate the same weight to each stock, offer a tilt toward smaller companies and value-oriented, defensive sectors.
This diversification strategy is gaining traction as investors seek to avoid the risks associated with market cap-weighted indices, which concentrate heavily on larger companies. Big tech stocks have recently dwindled as investors expected delayed returns on investments from artificial intelligence projects. Draper pointed out that equal-weight indices are also seeing increased activity in derivatives, such as the E-Mini futures contract.
Recent Market Trends
July’s strong performance of small-cap stocks, following U.S. inflation data, indicated cooling and bolstered hopes for a September Fed rate cut. The labor market is also cooling, which flared up recession fears. This is why the defensive sector has also gained momentum lately.
The success of defensive sectors suggests that diversification is paying off. As investors face global market volatility, shifting expectations for Fed rate cuts, and other market disruptions, smaller stocks and defensive sectors offer potential advantages.
ETF Areas in Focus
Small-Caps – iShares Russell 2000 ETF (IWM - Free Report)
Market participants suggest that small- and mid-cap stocks could benefit as the Federal Reserve considers rate cuts. After years of underperformance, small caps now appear very attractively valued. U.S. economic conditions, too, do not appear extremely recessionary despite downbeat jobs data (read: Small-Cap Stock Investing: Why Quality Matters).
After global equities experienced a sharp sell-off earlier lately due to a disappointing July jobs report and the unwinding of yen-funded carry trades, economists raised the likelihood of the U.S. economy slipping into a recession. This has boosted the appeal for utilities ETFs like XLU as the sector is non-cyclical in nature and fares better in a falling rate environment (read: ETFs to Secure Your Portfolio Amid Uncertain Market Conditions).
The potential slowdown in the economy could benefit consumer staple stocks, as these companies manufacture everyday necessities such as food, beverages and household items. Additionally, surging household debt levels could burn a significant hole in consumers’ pockets and prove to be a positive for these funds.
Healthcare – Health Care Select Sector SPDR Fund (XLV - Free Report)
The healthcare sector is non-cyclical, providing a defensive tilt to the portfolio amid market turmoil. Further, the long-term fundamentals remain strong, given encouraging industry trends.
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Time to Buy These 4 ETF Areas?
Following a period subjugated by the “Magnificent Seven” mega-cap tech stocks — similar to the dotcom bubble — investors are now looking beyond the big techs. Dan Draper, CEO at S&P Dow Jones Indices, indicated that a market shift is taking place and suggests that diversification into smaller stocks is a “free lunch” for long-term investors as market trends evolve, as quoted on CNBC.
The Appeal of Equal-Weight Indices
Draper also indicated that there is a growing interest in equal-weight indices, which provide balanced exposure to all stocks, regardless of size. Equal-weight indices, which allocate the same weight to each stock, offer a tilt toward smaller companies and value-oriented, defensive sectors.
This diversification strategy is gaining traction as investors seek to avoid the risks associated with market cap-weighted indices, which concentrate heavily on larger companies. Big tech stocks have recently dwindled as investors expected delayed returns on investments from artificial intelligence projects. Draper pointed out that equal-weight indices are also seeing increased activity in derivatives, such as the E-Mini futures contract.
Recent Market Trends
July’s strong performance of small-cap stocks, following U.S. inflation data, indicated cooling and bolstered hopes for a September Fed rate cut. The labor market is also cooling, which flared up recession fears. This is why the defensive sector has also gained momentum lately.
The success of defensive sectors suggests that diversification is paying off. As investors face global market volatility, shifting expectations for Fed rate cuts, and other market disruptions, smaller stocks and defensive sectors offer potential advantages.
ETF Areas in Focus
Small-Caps – iShares Russell 2000 ETF (IWM - Free Report)
Market participants suggest that small- and mid-cap stocks could benefit as the Federal Reserve considers rate cuts. After years of underperformance, small caps now appear very attractively valued. U.S. economic conditions, too, do not appear extremely recessionary despite downbeat jobs data (read: Small-Cap Stock Investing: Why Quality Matters).
Utilities – Utilities Select Sector SPDR Fund (XLU - Free Report)
After global equities experienced a sharp sell-off earlier lately due to a disappointing July jobs report and the unwinding of yen-funded carry trades, economists raised the likelihood of the U.S. economy slipping into a recession. This has boosted the appeal for utilities ETFs like XLU as the sector is non-cyclical in nature and fares better in a falling rate environment (read: ETFs to Secure Your Portfolio Amid Uncertain Market Conditions).
Consumer Staples – Consumer Staples Select Sector SPDR Fund (XLP - Free Report)
The potential slowdown in the economy could benefit consumer staple stocks, as these companies manufacture everyday necessities such as food, beverages and household items. Additionally, surging household debt levels could burn a significant hole in consumers’ pockets and prove to be a positive for these funds.
Healthcare – Health Care Select Sector SPDR Fund (XLV - Free Report)
The healthcare sector is non-cyclical, providing a defensive tilt to the portfolio amid market turmoil. Further, the long-term fundamentals remain strong, given encouraging industry trends.