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Index investors and so-called Bogleheads (those who love the Vanguard ETFs) may not be all too fond of the sector ETFs, especially when you consider that simply buying the S&P 500 covers most of one’s bases when it comes to diversification. That said, with the rise of the Magnificent Seven companies, one could make a pretty strong argument that the S&P 500 is now more of a tech index. It’s certainly tech-heavier than anytime in the past, even as the Mag Seven names begin to consolidate for a bit longer.
As the AI revolution plays out and the Mag Seven grow stronger, I certainly wouldn’t be surprised if the information technology sector were to eventually make up closer to 50% of the index. With the likes of Alphabet (NASDAQ:GOOGL), a tech stock that’s grouped in the communication services sector, one could argue that the tech exposure in the S&P is far greater than it seems on the surface. Arguably, the real tech exposure may already be closer to 45% of the basket of 500 stocks.
In any case, those who, for some reason or another, don’t want so much tech and AI exposure (AI bubble fears perhaps?), there’s a quick and easy fix: sector ETFs.
That said, if you’re going by past performance, backing up the truck on sector ETFs can be a risky move. In short, I view sector ETFs as a great tool for passive investors, especially for those seeking more diversification or opportunities in certain corners of the market. Here are two sector ETFs to help rebalance an S&P 500-heavy portfolio.
State Street Utilities Sector SPDR ETF
If there were to be a big correction in the AI stocks, the utilities could be one of the steadier places to hide out. Also, given the power demands of all those big AI data centers going up, the utilities are going to need to play a bigger part. The State Street Utilities Sector SPDR ETF (NYSEARCA:XLU) stands out as a great sector ETF to diversify into, especially given that the sector isn’t very well represented by the S&P 500 anymore.
Undoubtedly, utilities may be a drag on your portfolio’s longer-term returns, especially relative to the tech-heavy S&P 500 or Nasdaq 100. That said, you’re getting a lower degree of correlation to the rest of the market (0.59 beta) alongside a slightly sweeter dividend (2.71% yield).
In the past year, the ETF gained 13%, which is a pretty respectable return given the lower risk profile and the unique role that the utilities play in powering the AI boom. With a low 0.08% expense ratio, it’s never been cheaper to beef up one’s portfolio with the major players in the utility scene.
State Street Health Care Select Sector SPDR ETF
The State Street Health Care Select Sector SPDR ETF (NYSEARCA:XLV) is another great way to play defense, especially if you’re convinced tech will face rougher sledding in 2026. With an even lower beta (0.59), the health players stand to be less moved in those big market down days.
With the ETF gaining just 34% in the past five years, though, the relative underperformance to the S&P is quite stark. In any case, there’s less-correlated value to be had in the health care waters, whether we’re talking about the managed care providers or the more innovative biopharma firms.
Goldman Sachs (NYSE:GS) strategist David Kostin seems to think the sector is rich with low valuations and “more opportunity for alpha than beta.” I think Kostin is right on the money. Where some see dead money, others see deep value and unrecognized growth opportunities. While picking individual names, especially those outlined by Goldman, might be a good way to go, I’m also a fan of spreading one’s bets across the sector with the likes of a health care ETF.
Personally, I think passive investors can do just fine going down the ETF route as they look to “correct” their relative underexposure to the industry.