According to Goldman Sachs, the market cap of the largest stock is now 750 TIMES the market cap of a 75th percentile stock.
To put this in perspective, even at the peak of the 2000 dot-com bubble, this metric only reached 550X.
For investors, this level of concentration in the equity markets significantly raises risks to even the most vanilla buy-and-hold portfolios.
Even an investment as straightforward as an S&P 500 ETF is significantly overweighted to big technology companies like Nvidia (NVDA), Apple (AAPL), or Microsoft (MSFT).
And, if you’re an investor who prefers a long-term, low-churn strategy that would emphasize buy-and-hold, you may be less likely to reallocate your portfolio at a time like this, when it could be most valuable.
So, with that in mind, I’d like to share a handful of ETFs that you can add to your portfolio to reduce your concentration risk without significantly changing your overall risk profile.
3 ETFs to Add to Your Portfolio
A smart strategic move right now to protect your capital gains and portfolio should be to move some cash into Invesco’s S&P 500 Equal Weight ETF (RSP).
The 500 stocks in this S&P 500 Equal Weight ETF basket are weighted equally, rather than weighted by market value. This translates on a sector basis to a more balanced 16% allocation to tech, 14% to industrial stocks, 13% to financials, 13% to healthcare, and 11% to consumer stocks.
Then consider the iShares MSCI USA Quality Factor (QUAL).
As its name suggests, the $25 billion fund invests in large and midcap firms that show strong fundamentals. Those include a high return on equity, stable yearly earnings growth, low debt, wide moats, trustworthy management, and balance sheet strength.
But if you want to go ultra simple, consider the Vanguard Total Stock Market Index (VTI). With an annual fee of just 0.03% and assets of over $1.3 trillion, this ETF is a basket of over 4,000 stocks. While it’s market cap-weighted toward the largest companies in the nation, it also gives you exposure to midcap and small-cap names that are “under the radar” for most investors.
On top of your core ETF portfolio, I suggest around twenty stocks that include a blend of dominating blue chips and more aggressive, disruptive stocks. This is where the Cabot Explorer and all the other Cabot Wealth Network products can help you make the best choices.
Finally, don’t forget to take some profits from time to time. We have all been there. Nothing is more painful than picking a great stock and watching it peak and then fall back to earth.
If you are fortunate enough to have a stock or fund double in value, sell some of your position to turn paper profits into real profits.
Also, whenever you buy an aggressive stock, it’s smart to put in place a 20% trailing stop-loss. This is important because it takes emotion out of the equation and protects your hard-earned gains or limits your losses so you can fight another day.
Join the Cabot Explorer today to learn more about getting the right ETFs and stocks into your portfolio.