You May Be Holding An Undercover Tech Portfolio

Popular index ETFs are behaving like tech portfolios due to their high tech ownership rates. Are you holding an undercover tech portfolio?


The first two weeks of 2022 have continued to see volatile markets in North America with the Nasdaq down 5.2%, S&P 500 down 2.3% and TSX slightly up.

With US CPI (inflation) numbers now at +7% YoY, investors are increasingly focused on sustained inflation readings and when, not if, central banks will start hiking rates and to what degree.

Our previous newsletters have highlighted the shift to Value that has been occurring in the market. To quickly revisit, higher inflation and interest rates benefit cyclical industries and financials while hurting technology/growth focused areas.

While you may be positioning for this, unbeknownst to you, your core ETF holdings may actually be undercover technology portfolios. Popular indices and ETFs like the Nasdaq-100 (QQQ and XQQ ETFs), S&P 500 (VFV, ZSP, SPY ETFs) and asset allocation funds like VEQT have a high degree of technology ownership.

While you may think you are owning diversified products, these ETFs are heavily influenced by their technology exposure and can become a drag on your performance if the Value rotation continues to develop.

ETF Correlation With Tech

Narrowing in on a few ETFs popular amongst Canadian investors, let's explore how they're correlated. Leveraging Investipal's correlation matrix feature in the chart below, XQQ is the iShares Nasdaq-100 ETF which we will use as a Growth/tech proxy to compare against.

As seen below, XQQ is highly correlated with XEQT (iShares Core Equity ETF), ZSP (BMO S&P 500) and even ZCN (BMO TSX Composite). This means any moves within the technology space can end up influencing popular index ETFs you may be holding.

Digging into these indices, it's no surprise why. The S&P 500 is now sitting at 29% technology and XEQT/VEQT are sitting at 20%.

However, by including something like ZEB (BMO Equal Weight Canadian Banks ETF) into your portfolio you drop that correlation significantly.

How To Hedge Against This

The easiest way to hedge against a tech dominant portfolio is to change your allocations into areas not heavily influenced by tech. This includes increasing your weight into Canada, cyclical sectors or Value-focused funds and out of funds with a high degree of Tech exposure. Within Investipal, when you research new ETFs, pay attention to the sector allocation of that fund. In the example below, for XCV (iShares Canadian Value ETF), there is no technology ownership while having a high degree of cyclical and financials weighting.

When building your portfolio, you can also leverage our built-in correlation matrix to ensure:

  1. Your portfolio holdings aren't correlated with one another.
  2. Your holdings aren't highly correlated to technology areas like the Nasdaq-100.

Concluding Thoughts

A sustained rotation out of Growth (tech) into Value (cyclicals) is becoming more evident with sustained inflation. As investors make this switch, it's important to consider your sector allocations and exposure to tech. By running highly correlated portfolios you can compound your risk with any market sell-off or rotation.

Check us out if you need assistance building the right ETF portfolio for you. We offer a platform to easily research and construct ETF portfolios for your unique goals and traits.

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