Popular investing strategy losing appeal with stocks at record finding

ETF investors eye small caps and international as they seek rebalancing, says Strategas senior ETF strategist

Passive investing through exchange-traded funds may be losing its appeal.

Tidal Financial Group Chief Revenue Officer Gavin Filmore finds many of his clients are no longer satisfied with buying popular ETFs tied to market indexes.

“I think investors are looking beyond just the let’s call it the ‘VOO and chill approach’ where you just buy the index in an ETF, which is a great approach but they’re looking for diversification,” Filmore told CNBC’s “ETF Edge” this week.” “And they’re not finding it within the product or within the index, so they have to look beyond that.”

Filmore refers to the Vanguard S&P 500 ETF (VOO), which tracks the S&P 500‘s performance. Both are up almost 16% so far this year.

‘Imbalance is the perfect word’

Meanwhile, Strategas Securities’ Todd Sohn contends investors are losing diversification by using the S&P 500 as a benchmark.

“Imbalance is the perfect word,” said the firm’s senior ETF & technical strategist in the same interview. He added technology now accounts for more than 35% of the index, a record high.

Meanwhile, defensive sectors including consumer staples, health care, energy and utilities are at an all-time low weight of 19% in the S&P 500, according to FactSet.

So, where are traders turning? Sohn is seeing renewed interest in small-cap stocks.

The Russell 2000, which tracks the group, hit an all-time high on Wednesday and just saw its best week since August. It’s now up more than 28% over the past six months — outperforming the S&P 500. Earlier this month, the Russell 2000 topped 2,500 for the first time ever.

“I wonder if you’re seeing this broadening happen outside the large cap space where investors are comfortable with their tech and AI exposure and seeking other routes,” Sohn said.

While there is a growing chorus of voices throwing support behind the small caps, the heavy hitters will take center stage on Wall Street next week. That’s when five of the seven so-called “Magnificent 7” — Meta Platforms, Alphabet, Microsoft, Apple and Amazon — are due to report their latest earnings.