ETFs & Markets with Todd Sohn: Is Tech’s Buy-the-Dip Mentality Fading?

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We're going to touch on concentration risk, the buy-the-dip mentality in tech ETFs, active ETFs, and two areas that I think are very interesting based on flows and volume. It is early February, and this is a chart we like to run every month, showing the concentration of the ten largest and the five largest weights in the S&P 500.

I'm starting to wonder if concentration has peaked. Of course, we do not have a magic ball for the future, but this has been a very important sticking point for investors. The ten largest stocks have been almost 40% of the S&P 500 weights, but there has been some stalling out among some of the more significant names within that cohort.

I’m just curious if maybe we’re finally in the process of seeing these stocks lose influence. I think that would be helpful for diversification.

What also suggests this is the continued buy-the-dip mentality toward technology ETFs. This is a scatterplot of January’s ETF flows versus the trailing one-year flows for these major sectors.

As you can see, tech continues to have inflows despite relative performance peaking roughly eight months ago. That’s on a cap-weighted basis. I just tend to wonder when this buy-the-dip mentality may start to fade. You kind of think about when anxiety will finally start to pick up for technology.

Even though other areas like industrials, discretionary, and somewhat of healthcare are starting to outperform, the flows there are not exactly aggressive. I’m curious if concentration risk starts to dry up and when the buy-the-dip mentality for tech finally starts to really fade once underperformance becomes more evident to investors.

Where this is important is for the growth of actively managed ETFs, especially for equity ETFs. There’s been a major surge into actively managed strategies.

Part of this comes from the transition from mutual funds to ETFs in recent years. But as this chart shows, we’re almost at $1 trillion in actively managed ETFs across equity, fixed income, and nontraditional strategies that use leverage, derivatives, and more complex portfolio strategies.

Seeing concentration risk stall out is ideally helpful for managers who have perhaps watered down Mag-7-type large-cap tech exposures. We continue to expect the actively managed space to benefit no matter what the marketplace looks like, as demand grows for different strategies within portfolios.

Moving away from tech and active management, I want to highlight two interesting areas in terms of flows. The first is European financials.

Here’s a European financials ETF that hit a new high as of early February. This suggests there’s no major credit crisis because whenever there’s a credit crisis, European financials are usually in trouble.

What’s interesting is that when you compare the current environment to the 2016–2018 period, this fund took in roughly $2 billion during 2016–2018 when performance was strong. However, demand is much less intense this time, which I think is interesting. It highlights the kind of ignorance towards Europe’s strength and why we think Europe is in a favorable position, making it a great area for diversification in portfolios.

We’ll keep an eye on this to see if there are any further inflows, but so far, so good for Europe and the contrarian case for what’s happening there.

Lastly, I want to take a look at gold. Gold has been a great diversifier for portfolios. I want to keep a close watch on the dollar volume for gold ETFs. Usually, when you see a spike in gold ETF volume, it can coincide with short-term peaks. However, we haven’t seen much interest there.

I wonder if it’s because stocks have been so strong, cash is yielding 4–5%, and crypto has been an interesting momentum play, leading people to forget about gold. There hasn’t been much inflow, no big spike in volume for gold ETFs. We actually like that. While gold may be a little stretched in terms of trend, our sentiment work does not indicate excessive enthusiasm towards gold. That’s a positive sign for its continued role as a portfolio diversifier.

That’s what we have today. I hope this was helpful, and let us know if you have any questions.

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