Investors Worried About Concentration and Valuations in Major Indexes Are Embracing Value, Dividend, and Rules-Based Funds To Start 2025
Since the pandemic, it feels like tech has been the only game in town. But to start the year, it feels like investors are increasingly cautious about that outlook. Maybe it’s the richest market valuations of all time, lofty and unproven AI spending, or the rattling of geopolitical tensions and China’s new AI, DeepSeek. Either way, the turbulence is reigniting conversations around the V word: value.
Cash now (and later): The Nasdaq-100 and S&P 500 have never been as concentrated as they are right now, with Mag7 stocks like Google, Amazon, and Microsoft making up astounding percentages of the index. The top 10 companies in the Nasdaq-100 make up 50.1% of its weight, and in the S&P 500, 36%. As a result, hands-on investors are seeking new ways to gain exposure to a wider variety of stocks — everything from equal-weight ETFs to dividend-focused portfolios and rules-based investing. They’re coming off the line early in 2025.
- Value-focused funds like the Vanguard Value ETF and dividend-focused funds like the Vanguard Dividend Appreciation Index are both outperforming major indexes to start the year — up 5% and 4.7% year-to-date.
- The embrace of these strategies follows record inflows into equal-weight funds like the Invesco S&P Equal Weight ETF, a popular way to invest in the “S&P 493,” which has traded blows with the base index to start the year.
New Ideas About Value
Conversations about “value vs. growth” are some of the more common pickings of the market, particularly as some analysts liken today’s environment to the Dotcom bubble and other costly crashes. But simply buying the old-fashioned value funds might not be enough, especially if pundits are to be believed. New strategies might be required to find real value.
- In a new WSJ story, Spencer Jakab highlights rules-based funds such as the U.S. Cash Cows Index, a “free-cash-flow-based index” that holds firms with the most “money left over after expenses and capital expenditures.”
- has returned 15.7% per year over the last five years, spurring copycat funds from Global X, Invesco, and Dow Jones.
But does value matter? For many investors — particularly hands-off, 401(k) and IRA investors — strict adherence to a diet of major indexes may be the most cost-effective and low-maintenance way to invest. However, for more hands-on investors, hedging against an extremely tech-heavy portfolio could offer you more opportunities to generate cash flow, reduce volatility, or even outperform certain indexes if they struggle this year. As with anything, consider your investment goals before making any changes.
