Big Tech Might Be Making ETFs Riskier. Here’s How You Can Stay Diversified.

Big Tech Might Be Making ETFs Riskier. Here’s How You Can Stay Diversified.
Theodora Lee Joseph, CFA

4 months ago2 mins

Even if you want to, you can’t ignore US tech stocks. The “Magnificent Seven” – Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta – now make up more of the global stock market (MSCI All Country World Index) than the countries of Japan, France, China, and the UK combined. So if you have any exchange-traded funds (ETFs) that track the global market, you likely have a lot more of your eggs in the tech basket than you thought. And that applies to specific holdings too: the Magnificent Seven makes up 12% of the holdings in Norges, Norway’s $1.4-trillion wealth fund, but accounted for a third of its gains in the first half of this year.

And while big firms are dominating indexes, smaller companies are being pushed to the side. Plenty of them were snapped up by bigger firms when interest rates were low. Case in point: Germany’s lost over 40% of its publicly traded companies since 2007, and the US has experienced a 40% decrease since 1996. For the ones that still exist independently, today’s high-rate environment means it’s increasingly challenging to get hold of necessary funding.

That’s bad news for retail investors. Today’s stock market is less diversified than it would be if smaller firms carried more sway, and your index punt now gets you a dwindling portion of the corporate universe. And with Big Tech only getting bigger, that won’t change anytime soon.

So here’s what you can do: take a more active approach to ETFs, making sure you understand their composition. If you’re not happy with the risk of a higher concentration, you could add more to other regions or specific sectors. If you want more weight in smaller companies, your best option could be to start investing in early-stage companies via crowdfunding platforms. And as that tactic comes with more risk, you’ll want to be sure that the core of your portfolio is stable enough to handle it.



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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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