Investor concerns over lofty AI valuations and escalating capex are nothing new. Investor sentiment toward companies tied to the AI trade has deteriorated sharply in recent weeks, extending the sector's downturn.
The tech-heavy Nasdaq Composite fell about 0.2% on Tuesday, extending its losses to roughly 1.5% over the past five trading sessions and 0.9% over the past month amid rising concerns over the sustainability of AI investments.
Semiconductor stocks have been among the hardest hit, with the performance of the Philadelphia Semiconductor Index (SOX) underscoring the heightened volatility among chipmakers. SOX fell about 4.5% in Tuesday's session, bringing its losses to approximately 9.8% over the past five trading sessions and 17.8% over the past month.
Semiconductor Slump Deepens
Adding to the uncertainty, semiconductor stocks are increasingly being viewed as entering bear market territory. Semiconductor stocks seem to have fallen out of favor with investors, resulting in a sharp selloff across the industry.
According to a CNBC article, more than $1 trillion has been wiped off the market value of the world's largest chipmakers this week, reflecting rising concerns over the sustainability of AI spending. Per the article, NVIDIA NVDA has led the selloff, losing about $238 billion in market capitalization since Friday's close, with Micron MU losing $113 billion.
Questions Over Circular Financing Grow
Investor sentiment was also dampened by growing concerns over AI-related circular financing deals. NVDA shares came under pressure following reports that the company is discussing approximately $250 billion in financing guarantees for OpenAI to support a large-scale data center project, as per the Wall Street Journal and as quoted on Reuters.
The report added that the guarantee would not extend to NVIDIA chips deployed in the data center. However, financing for up to $350 billion in OpenAI's chip purchases is also reportedly being discussed, fueling concerns that AI infrastructure spending may be becoming increasingly circular.
Global ETFs to Buy
In the current market environment, diversifying beyond the technology sector may be worth considering. Diversification has been one of the most effective strategies for building resilient portfolios and providing a more balanced risk-return profile.
In many ways, diversification is no longer optional but is becoming a form of self-preservation in markets increasingly driven by heightened weakness in the AI trade and the broader tech sector. With U.S. equity markets heavily influenced by a handful of mega-cap technology stocks, adding global exposure can provide an additional layer of diversification.
International ETFs
With diversification emerging as a compelling strategy amid market uncertainty and weakness in the AI trade, expanding beyond U.S. markets can strengthen portfolio resilience and improve overall diversification.
Global ETFs offer investors broader geographic exposure, helping reduce concentration risk while creating a more balanced portfolio. In addition, international equity ETFs could also potentially boost risk-adjusted returns.
Investors can consider funds like Dimensional International Core Equity Market ETF DFAI, Avantis International Equity ETF AVDE and Schwab Fundamental International Equity ETF FNDF.
Financials and industrials are the two largest sector allocations across all the funds, with each fund maintaining double-digit exposure to both sectors. Regarding annual fees, DFAI is the cheapest option, charging an annual fee of 0.18%. The above funds maintain well-diversified portfolios, with no single holding accounting for more than 3.5% of the portfolio.
Japan, the United Kingdom and Canada are among the top country allocations across the mentioned funds. FNDF is the largest option, with an asset base of $24.45 billion, while DFAI is the most liquid, with a one-month average trading volume of about 1.57 million shares.
International Value ETFs
In addition to providing broader geographic diversification, international funds with a value tilt can offer investors an added advantage in the current market environment. Value investing has become particularly compelling as investors seek companies with strong fundamentals, solid financial health and attractive valuations.
Value ETFs focus on stocks characterized by strong fundamentals and robust financial health, which trade below their intrinsic value. Investors can consider Dimensional International Value ETF DFIV, Avantis International Large Cap Value ETF AVIV and iShares MSCI EAFE Value ETF EFV.
Financials represent the largest sector allocation across all of the above funds, with AVIV having the lowest exposure at 31%. Information technology, on the other hand, represents only a modest share of each portfolio, with AVIV holding the highest exposure at just 4%.
Japan is the largest country exposure across all the funds, followed by the United Kingdom. AVIV is the cheapest option, charging an annual fee of 0.25%. EFV is both the largest and most liquid fund, with a one-month average trading volume of about 4.79 million shares and an asset base of $28.17 billion.
The above funds maintain well-diversified portfolios, with no single holding accounting for more than 3.5% of the portfolio.
International Dividend ETFs
Investors can also consider global dividend-focused funds. Dividend-paying securities serve as primary sources of reliable income for investors, particularly during periods of equity market volatility. Companies offering dividends often act as a hedge against economic uncertainty.
Investors can consider iShares International Select Dividend ETF IDV, Franklin International Low Volatility High Dividend Index ETF LVHI and iShares International Dividend Growth ETF IGRO, with dividend yields of 5.23%, 4.50% and 2.65%, respectively.
The abovementioned funds have almost negligible exposure to the information technology sector, with the exception of IGRO, which has an exposure of about 7%. Financials remain the top sector allocation across all of the above funds, with LVHI having the least exposure to the sector at 25.15%.
The funds are also well-diversified, with no single holding accounting for more than 5% of the portfolio. Regarding annual fees, IGRO is the cheapest option, charging 0.15%. IDV is both the largest and most liquid fund, with a one-month average trading volume of about 846,000 shares and an asset base of $8.22 billion.
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Schwab Fundamental International Equity ETF (FNDF): ETF Research Reports
iShares MSCI EAFE Value ETF (EFV): ETF Research Reports
iShares International Dividend Growth ETF (IGRO): ETF Research Reports
Avantis International Equity ETF (AVDE): ETF Research Reports
Dimensional International Core Equity Market ETF (DFAI): ETF Research Reports
Dimensional International Value ETF (DFIV): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
