AI Fatigue Setting In: ETFs That May Offer Respite
The AI trade is showing cracks. Last week's "software-mageddon" sell-off in U.S. software and data services, plus rising scrutiny of Big Tech's AI capex, signaled a shift in risk appetite. The weakness bled into financials as investors reassessed AI-driven disruption across balance sheets and business models.
By Thursday, selling broadened. Trucking, logistics, and real estate services were hit, with the S&P 500 down about 1.6% and the Nasdaq off roughly 2.0%. Shares of C.H. Robinson (CHRW) and Universal Logistics (ULH) slid after a Florida-based firm touted a tool to scale freight volumes without extra headcount-fueling a "sell first, ask questions later" response to anything AI-adjacent.
The perceived threat is now showing up in filings. A recent study cited that roughly three-quarters of S&P 500 companies identified AI as a material risk-up from 12% in 2023. That shift matters for portfolio construction and risk budgeting.
What this means for portfolios
Concentration risk in AI-sensitive names is getting repriced. If your equity sleeve leans into software, semis, or data services, consider offsetting with lower-beta, cash-flow-steady exposures. The goal: preserve capital, cut volatility, and still participate when conditions improve.
ETFs to consider
These areas balance defense with reasonable upside, helping smooth drawdowns while keeping portfolios engaged with the cycle.
Utilities (low beta, steady demand)
- Utilities Select Sector SPDR (XLU) - Zacks ETF Rank #2 (Buy), dividend yield ~2.6%
- Vanguard Utilities ETF (VPU) - Zacks ETF Rank #2 (Buy), dividend yield ~2.61%
- iShares U.S. Utilities ETF (IDU) - Zacks ETF Rank #2 (Buy), dividend yield ~2.11%
Utilities are a classic defensive sleeve. Stable cash flows and inelastic demand tend to cushion drawdowns when growth expectations wobble.
Consumer Staples (defensive cash flows, balance to cyclical risk)
- Consumer Staples Select Sector SPDR (XLP) - strong recent momentum; up ~10.30% over three months and ~7.45% over one month
- Vanguard Consumer Staples ETF (VDC)
- iShares U.S. Consumer Staples ETF (IYK)
Staples add ballast when discretionary spending slows. These funds have held up well recently as investors rotated toward defensives.
Dividend ETFs (income + quality tilt)
- Vanguard Dividend Appreciation (VIG) - dividend yield ~1.55%, Zacks ETF Rank #1 (Strong Buy)
- Schwab U.S. Dividend Equity (SCHD) - dividend yield ~3.31%, Zacks ETF Rank #2 (Buy)
- Vanguard High Dividend Yield (VYM) - dividend yield ~2.24%, Zacks ETF Rank #1 (Strong Buy)
Dividend payers can help dampen volatility. These strategies lean into mature operators with healthier balance sheets and consistent payouts.
How to put this to work
- Right-size cyclicals: Trim AI-sensitive exposure and reallocate 10-30% of your equity sleeve across utilities, staples, and dividend ETFs based on your risk budget.
- Blend defensives: Mix utilities for rate sensitivity with staples for earnings stability; layer a dividend ETF for income and a quality tilt.
- Watch overlap: Check top holdings across ETFs to avoid unintended concentration; keep an eye on expense ratios and sector caps.
- Phase entries: Add in increments and rebalance quarterly to keep target weights intact through volatility.
For finance teams building AI literacy while pressure-testing risk, you may find this resource useful: AI tools for finance.
This content is for informational purposes only and is not investment advice. Do your own research or consult a fiduciary before making allocation decisions.
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