The broader market could soon go through some pivotal changes in the near future as we turn the page to December, with investors confident about another rate cut this month. If you also have a hunch that the pendulum may swing back, it makes sense to avoid VanEck Semiconductor ETF (NASDAQ:SMH | SMH Price Prediction), State Street Technology Select Sector SPDR ETF (NYSEARCA:XLK), and buy Amplify CWP Enhanced Dividend Income ETF (NYSEARCA:DIVO) instead.
I’m not at all advocating for you to dump all your tech holdings, but it makes sense to trim these holdings and rotate into safer ETFs. The slight pullback could be another head fake indeed, but the market is running into liquidity issues. It is hard to see another record rally under these conditions. Plus, it is turning into an uphill battle for aggressive growth companies to continue impressing the market.
With that in mind, let’s take a look at each of those ETFs in detail.
VanEck Semiconductor ETF (SMH)
There are several semiconductor ETFs in the market, and SMH happens to be the biggest. It has gained 43.9% year-to-date and over 220% over the past five years.
If you park your money here and wait another five years, chances are that you’ll be just fine.
Those chances are getting slimmer, and a 30-40% correction is looking more likely. A 2000-esque downturn here is far-fetched, as chips are everywhere these days. If somehow there’s limited chip demand from the AI sector, semiconductor manufacturers can still get by.
But today, the downside risk does not justify the potential long-term upside. SMH has 16.94% exposure to Nvidia (NASDAQ:NVDA) alone, with the top 10 holdings constituting ~75% of the entire ETF.
It’s a good idea to rotate out some gains and avoid a hit if chip stocks enter a cyclical downturn.
State Street Technology Select Sector SPDR ETF (XLK)
XLK has been another beast of an ETF. It has returned 23.4% year-to-date, thanks to its tech-heavy holdings. Its peer Vanguard Information Technology Index Fund ETF (NYSEARCA:VGT) is more popular, but is more diversified with 317 total holdings, vs. XLK’s 72.
These tech holdings have served XLK well, but it’s time to seriously consider trimming your holdings. NVDA constitutes 14.26% of this ETF, with the top 10 holdings making up 62.21% of XLK.
It’s too top-heavy, and I would avoid having more exposure to it.
Even if Nvidia keeps making a killing for the next few quarters, there are macro issues that can bring down tech valuations significantly. If not, it’ll only take one disappointment from Nvidia to crater the tech sector by double digits overnight.
Whichever way you slice it, having less tech exposure today than you did a few months ago is a smart idea.
ETF to Buy: Amplify CWP Enhanced Dividend Income ETF (DIVO)
If you are investing in growth ETFs, what’s one thing in common that almost every ETF in your portfolio has? Chances are that Nvidia is the top holding, often with double-digit exposure. The S&P 500 itself has a 7.54% exposure to NVDA stock.
All that overlapping exposure to a handful of tech stocks can be great on the way up, but very ugly on the way down.
To remedy this, I would look into the Amplify CWP Enhanced Dividend Income ETF. This ETF holds American Express (NYSE:AXP) as its biggest holding, followed by IBM (NYSE:IBM), and RTX (NYSE:RTX).
DIVO also has a conservative covered call overlay, which allows it to yield 4.55% in dividends.
The drawdowns in a downturn are much lower, and you’ll get paid to wait as the broader market recovers.
Dividends are paid monthly, and the expense ratio is 0.56%, or $56 per $10,000.
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