Portfolio concentration risk is taking on a new form for investors who have long been told to follow part of Warren Buffett’s stock advice: “Never bet against America,” as a small number of mega-cap tech and AI stocks at the top of the S&P 500 dominate the U.S. market in a historically unprecedented manner.
But nine tech stocks, which outnumber Buffett’s Berkshire Hathaway in the index, account for nearly 40% of the market, creating an imbalance that has investors looking for new ways to hedge. Buffett, who has long vocally questioned the value of precious metals, may not agree with their reaction, but many are turning to cash, gold and cryptocurrencies for uncorrelated returns and protection from volatility.
“When you break down ETF flows by category, it’s cash, precious metals, and cryptocurrencies,” Todd Thorne, senior ETF and technical strategist at Strategas Securities, told CNBC’s “ETF Edge” earlier this week, noting the most popular trades for investors this year. “They are clearly being adopted by the mainstream. [investors]. ”
He directly linked this trend to concentration risk. “Some investors realize they have a lot of exposure to technology and AI, so they need to differentiate and find uncorrelated assets,” Song said.
While some experts are recommending eyebrow-raising allocations to gold and cryptocurrencies, and there is increasing talk of 60-20-20 portfolios as an alternative to the classic 60-40 stock-bond mix, most allocations are still small but growing.
“Most of the conversations I’ve had and the allocation documents I’m about to read say crypto is 1-3%, 3-7%. [percent] As for the money,” Song said.
It’s been a tough week for gold, with significant selling, but this week’s trading is up more than 60% since the start of the year, so it wouldn’t be a big surprise to see some profit-taking. Gold hit a record high of more than $4,400 this month, supported by central bank purchases, a weak dollar, persistent geopolitical risks and the so-called “subsidence trade.”
SPDR Gold Shares (GLD) has seen about $6.8 billion in inflows over the past month, bringing net investor inflows to gold funds over the past year to near the $40 billion mark.
Cryptocurrencies, a more attractive new hedge for investors, also had a strong year, with gold’s return more than triple Bitcoin’s 17% and Ethereum’s 15% gain. The launch of the Spot Bitcoin ETF has brought institutional investors into the space, turning the digital asset into a legitimate portfolio tool. iShares Bitcoin Trust (IBIT) is one of the largest spot Bitcoin ETFs, with nearly $90 billion in assets under management, according to VettaFi.
Mr. Song says the use of ETFs to access new approaches to markets is central to the history and evolution of ETFs. “I started with large-cap stocks in 1993, gold and emerging markets in 2004, and now cover call products and yield max products,” Song said.
This also means investors can manage risk in a non-traditional way. Instead of relying on high-yield stocks or simple bond funds, you can build a portfolio with derivative-based ETFs and alternative exposures.
There is a similar story in crypto. With the introduction of regulated ETFs, Bitcoin and Ethereum are now recognized as components of a diversified strategy away from speculative trading. “The pace of development and innovation to launch these ETFs is lightning fast,” Song said.
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