In an Ongoing Rally, ETF Investors Should Review Their Market Tilts

As the U.S. bull market rally extends, ETF investors should re-evaluate their equity exposure and think about re-allocating their portfolio toward a more balanced approach.

“One of the things that is hard to ignore is the impact on overall market performance of technology,” President, VictoryShares and Solutions at VictoryCapital, told ETF Trends in a call.

The ongoing U.S. market rally is being supported by growth stocks, notably high-growth technology names that are making up an increasingly large portion of the market capitalization and investment portfolios. For example, if an investor were to be invested in the S&P 500, he or she would now have close to 25% in technology companies, including the likes of Apple (NasdaqGS: AAPL), and Microsoft (NasdaqGS: MSFT), among others.

“Every time you turn on the news you hear about this Amazon effect for example” Dhillon said. “When you think about it from a security level perspective, it’s making it that much more difficult for strategic beta products and especially fundamentally driven qualitative products to perform in the short run as the market tries to determine the true impact to competing companies.”

The outperformance in growth names has made smart beta and fundamental strategies look less attractive since many alternative index-based strategies that lean toward quality can also tend to have an overweight value tilt. While value may be less favored in the current market environment, growth names can’t continue to maintain its momentum forever and investors should think about re-allocating toward a more balanced portfolio.

“It keeps becoming more and more important that advisors step back from their clients’ portfolios for a second and say, ‘Okay, I know I may have some things that are doing well and some that are not, let’s understand and explain why, because we might be taking some unintended bets across sectors, factors or securities and not even realize it. So, the closer we get toward the end of a rally the better a time to analyze if they are as diversified as they think they are,’” Dhillon said. “Nothing seems broken when the markets are going up like it has been, but I tell you there are some pockets of concentration in client portfolios that they do not realize that may hurt portfolios on the way down as much as they have helped on the way up.”