Investors Hedge $17 Billion Against Big Tech, Driving Record Into Equal-Weight ETFs

In a significant shift in investor sentiment, hedge funds have been aggressively selling technology stocks, with a record $17 billion in net selling in June 2024. This trend, as reported by Goldman Sachs analysts, has driven investors towards equal-weight exchange-traded funds (ETFs) as a means of diversifying their portfolios and mitigating the risks associated with large-cap tech companies.

The net selling of technology stocks by hedge funds is a reversal of their buying trend earlier in the year, indicating a growing caution among investors regarding the tech sector. Semiconductor and semiconductor-equipment stocks have been the most dumped subsectors, followed by stocks in the software and internet sectors. This aggressive selling suggests that investors are becoming more mindful of the potential risks and volatility in the tech sector.

One of the primary concerns driving investors towards equal-weight ETFs is the recent volatility in Nvidia Corp.'s stock, which has sparked concerns about the sustainability of its astronomical rise. Although Nvidia's stock has been on a 13.1% monthly advance, its shares have tumbled over 2% so far in the week, raising questions about the market's ability to sustain the tech sector's rally.



Another factor influencing investor decision-making is the unprecedented level of economic stimulus passed by the U.S. government, which has caused concerns about rising inflation and interest rates. Although recent inflation data in the United States has shown muted consumer prices, the five-year inflation expectation has risen to its highest level in more than a decade. This has resulted in a significant spike in the yields of longer tenure bonds, with the yield on the 10-year Treasury note rising from the March 2020 low of 0.325% to 1.407% by the end of February 2021. This increase in interest rates can make long-duration tech stocks less attractive to investors, as the present value of their future earnings is reduced.

In response to these concerns, investors have been turning to equal-weight ETFs as a means of diversifying their portfolios and reducing their exposure to large-cap tech companies. Equal-weight ETFs allocate a substantially equal amount of money to each security in the fund, regardless of its size. This approach helps to mitigate the risks associated with overexposure to a single stock or sector and provides a more balanced exposure to the market.

The shift towards equal-weight ETFs addresses investors' concerns about the dominance of large-cap tech companies by spreading assets more evenly across all components of the fund. This approach reduces the impact of a few large-cap stocks on the overall performance of the fund and provides a more diversified portfolio that is less sensitive to the performance of individual stocks or sectors.

In conclusion, the aggressive net selling of technology stocks by hedge funds, the recent volatility in Nvidia Corp.'s stock, and concerns about rising inflation and interest rates have driven investors towards equal-weight ETFs as a means of hedging against big tech stocks and achieving a more balanced and diversified portfolio. As market conditions continue to evolve, investors may continue to seek out equal-weight ETFs as a means of managing risk and achieving their investment goals.