“Too much of a good thing can be wonderful!” Hollywood actress Mae West once quipped. And that’s certainly been the case for investors who have experienced a significant boost in their portfolio values due to surging technology stocks and funds. Even popular yardsticks like the S&P 500 are being lifted.

But too much of a good thing could cause unwanted investment risk.

Stock market growth of the “Magnificent 7,” which includes Apple, Alphabet, Amazon.com, Microsoft, Meta Platforms, Nvidia and Tesla are exercising an ever-increasing influence on stock market performance. This includes popular benchmarks like the S&P 500, which are often touted as diversified.

Today, the S&P 500 is much less diversified than at pervious points in history. 

The Magnificant 7 stocks, coined by Bank of America analyst Michael Hartnett in 2023 to describe the group of tech giants, make up nearly one-third of the S&P 500's entire market cap, and they have accounted for around 50% of the index's 27% gain so far this year. What it means is that a few monster-size companies have been driving the S&P 500’s overall return.

It’s likely that some client portfolios with heavy S&P 500 exposure have become more concentrated and risky.

Let’s analyze three ETF strategies for diffusing Magnificent 7 risk.

Equal Weighting
The Invesco S&P 500 Equal Weight ETF (RSP) takes the same 500 stocks within the S&P 500 and assigns each company an identical portfolio weight of 0.20%. That means the index’s smallest component, which is News Corporation, will have the same exposure and influence on the behavior and performance of the index as the largest component, Nvidia. 

An equal weighting investment approach prevents mega cap stocks from dominating. In RSP’s case, it has resulted in similar historical behavior to smaller and mid cap stocks found in the SPDR S&P 400 Mid Cap ETF (MDY). Over the past 20 years, RSP has gained 555% while MDY has climbed 564%.

Factor Weighting
Leaning away from large caps toward small cap stocks is another way to rediversify client portfolios. Moreover, small cap stocks have many attractive features.

"Valuation spreads between small and large cap stocks are as wide as they've been going back to the dot com era," said Paul Baiocchi, CFA and chief ETF strategist at SS&C ALPS Advisors. "Small caps are expected to grow earnings heading into 2025 on par or in same cases in excess of their large cap counterparts."

In addition to selecting small companies, the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF (OUSM) adds additional factor weightings like low volatility and dividend payers. Its factor loadings has helped OUSM gain around 32% during the past three years, significantly outperforming the iShares Russell 2000 ETF (IWM) by a 26% margin.

Active Management
The main idea behind active ETFs, like all active portfolios, is to provide alpha generating opportunities. To do this, it’s important for advisors to do their research by making sure the active funds they deploy are not closet index funds.

Since the S&P 500 is limited to choosing from a universe of large cap stocks, an active fund like the Avantis U.S. Equity ETF (AVUS) is a good example of something different. The fund invests across a broad range of large, mid and small companies.

And while some of the top holdings within AVUS resemble the S&P 500’s top holdings, a deeper dive shows a very different investment strategy. With higher exposure to industry groups like consumer discretionary, industrial and financial, AVUS has much different sector exposures compared to the tech heavy S&P 500.

In the end, advisors should be helping clients to reduce stock market risk and re-diversify when necessary. Now could be one of those times. 

Ron DeLegge II is the founder of ETFguide.com and author of several books, including Habits of the Investing Greats and Portfolio Architecture: A Handbook for Investors.