To The Moon

The AI boom has driven extraordinary gains in a small group of mega-cap technology stocks, often referred to as the Magnificent 7. These companies have dominated major indices like the S&P 500, accounting for a disproportionate share of recent market returns through investments in chips, data centers, cloud computing, and AI infrastructure. While the long-term potential of artificial intelligence remains significant, elevated valuations, high concentration risk, and uncertainty around the pace of real-world monetization have many investors concerned about a possible correction or sharp unwind in the "AI trade."

If your portfolio relies heavily on broad market ETFs such as those tracking the S&P 500, you may have unintended overexposure to these AI leaders. In such a scenario, an AI-driven sell-off could drag down your entire equity allocation. A strategic way to hedge is by incorporating ETFs that explicitly exclude major AI stocks or significantly reduce exposure to mega-cap tech. This approach preserves broad equity participation while mitigating concentration risk.

Why AI-Excluded or Low-Tech ETFs Work as a HedgeStandard market-cap-weighted indices amplify the impact of the largest stocks. When a handful of AI-related names surge, they dominate performance — and downside. ETFs with different construction methods or sector tilts offer better balance:Reduced concentration: Less reliance on a few high-valuation growth stocks.

Access to undervalued areas: Greater weight in value stocks, smaller companies, traditional sectors, and international markets.

Improved diversification: Better protection during periods when mega-cap tech underperforms.

Mean reversion potential: Historically, narrower market leadership eventually broadens, benefiting more diversified strategies.

Key Types of ETFs for AI Hedging

Equal-Weighted S&P 500 ETFs

These funds assign roughly equal weight (around 0.2%) to each of the 500 companies instead of weighting by market capitalization. This dramatically lowers exposure to the biggest AI names while still providing exposure to large U.S. companies.

Popular option: Invesco S&P 500 Equal Weight ETF (RSP). It typically carries a much lower technology sector allocation than cap-weighted peers and can serve as a core holding or complement to traditional S&P 500 funds.2. Explicit ex-Mag7 or Low-AI ETFs

Newer products directly exclude the Magnificent 7 or major AI players.

Example: Defiance Large Cap ex-MAG7 ETF (XMAG) tracks the S&P 500 minus those seven stocks, delivering broad large-cap exposure without the concentrated AI risk. This provides a cleaner hedge while maintaining U.S. large-cap diversification.3. Fundamental or Value-Weighted ETFs

These use metrics like revenue, dividends, cash flow, or book value rather than market price for weighting. This naturally tilts away from the most expensive growth stocks.

Notable choices include Schwab Fundamental U.S. Large Company ETF (FNDX), which limits heavy AI names, and value-focused funds that emphasize cheaper segments of the market.4. Small-Cap and Mid-Cap ETFs

Smaller companies have far less AI hype baked into their valuations and often operate in more traditional industries.

Consider broad small-cap funds or value-oriented ones like Dimensional US Targeted Value ETF (DFAT). These can benefit if capital rotates away from mega-caps.

Sector-Specific Defensive ETFs

For minimal or zero tech exposure: Utilities (e.g., Vanguard Utilities ETF - VPU)

Consumer Staples (e.g., Consumer Staples Select Sector SPDR - XLP)

High-dividend or low-volatility strategies that favor stable, non-growth sectors.

6. International and Global ex-U.S. ETFs

U.S. mega-cap tech dominates domestic indices, but many developed and emerging markets have lower AI concentration. Adding international exposure spreads risk geographically and across different economic drivers.How to Implement This Hedge in Your PortfolioCore-Satellite Approach: Keep a portion (e.g., 50-70%) in broad market ETFs for growth, and allocate 30-50% to equal-weight, ex-AI, value, or small-cap ETFs for balance.

Rebalancing: Regularly rebalance to maintain target allocations, which forces buying underperforming areas and selling outperformers.

Risk Considerations: These hedging ETFs may lag during strong AI rallies. Equal-weight and small-cap strategies can also experience higher volatility and periodic underperformance. They are not foolproof insurance but tools for better risk management.

Tax and Cost Efficiency: Use tax-advantaged accounts where possible. Focus on low-expense-ratio ETFs to minimize drag.

Overall Allocation: Combine with bonds, cash, or other uncorrelated assets for multi-layered protection.

Relying solely on market-cap-weighted indices in an era of extreme concentration is not true diversification — it's a bet on continued AI dominance. By deliberately adding ETFs that exclude or underweight major AI stocks, you create a more resilient portfolio that can better weather a potential unwind in the AI trade while still participating in long-term equity growth. Review your current holdings to understand your effective AI exposure, then tilt toward more balanced strategies