With the S & P 500 surging more than 18% in 2024, it might be time for investors to make a few defensive moves in their portfolios. The technology sector — including artificial intelligence play Nvidia — has helped lift the overall index, rising 33% this year alone. But that surge is spurring some financial advisors to reassess their clients’ exposure to large-cap tech and turn toward currently unloved asset categories that could be poised to rise. “We just put out our playbook and we’re advising clients that the research shows a flat market is likely over the next year or so, with a 5% to 10% pullback in between,” said Shon Anderson, chief wealth strategist and certified financial planner at Anderson Financial Strategies in Dayton, Ohio. “We are thinking that the second half of 2024 is going to look totally different from the first half, and when [Federal Reserve] rate cuts start, a lot of those unloved asset classes will come to life,” he added. Indeed, the market is already beginning to show signs of this rotation away from Big Tech highfliers, with the small-cap Russell 2000 up more than 10% in the past week, compared to a more modest 1.3% bump for the S & P 500. .RUT .SPX 5D mountain S & P 500 vs. Russell 2000 in past five days This recent migration into rate-sensitive areas of the market, such as banks and other financials, has been aided by June’s monthly decline in the consumer price index and Fed Chair Jerome Powell’s comments this week that the central bank won’t wait until inflation is down to 2% before cutting interest rates. Seeking income in less popular places Investors who are heavily invested in cash-like instruments will see a drop in income once the Fed begins lowering rates. But investors who are hoping to generate income and do so over the long term can find a host of opportunities. “Think about the equity portfolio and the potential to provide some additional income, as well as some of those sectors into which the market is incrementally broadening,” said Shannon Saccocia, chief investment officer of NB Private Wealth, a division of Neuberger Berman. Some of the places where investors can hunt down these plays include utilities — a play on the electrification theme, Saccocia noted — and real estate investment trusts. “From a sentiment perspective, there’s just an overhang of office [real estate] that’s continuing to impact investors in REITs in the public space,” she said. “But if you look at income generation, and you see rates start to come down, that could be an area that benefits from even one cut.” Saccocia also likes health care, which is up a modest 10% in 2024. “It might take a little longer to manifest but we think [health care] is an interesting combination of offense and defense, and it provides meaningful cash flows for investors,” Saccocia said. The Vanguard Dividend Appreciation ETF (VIG) , with a total return of 11.2% in 2024, has a 24.4% weighting in tech, but financials make up 19.7% of the fund, while health care accounts for another 16%. Household names in the exchange-traded fund include JPMorgan Chase , which is offering a dividend yield of 2.2%, and UnitedHealth Group , which has a yield of 1.5%. Checking in on risk and cash Investors reviewing their 2024 gains should also reassess their risk profile and consider whether their asset allocation reflects their long-term goals. “We’re trying to counsel more of a realistic long-term view,” said Colin Gerrety, CFP and client advisor at Glassman Wealth Services in North Bethesda, Maryland. “You want to keep in mind your overall strategy of diversification and making sure you have exposure to asset classes that aren’t necessarily doing well right now but may be poised to do well in the future.” Reviewing your asset allocation and risk profile also includes ensuring you have sufficient cash to meet 12 to 18 months of needs so that you don’t have to sell off positions from your portfolio in an emergency. Clients are holding this ready, liquid cash in money market funds, with the Crane 100 Money Fund Index showing an annualized seven-day yield of 5.12%, while others are using Treasury bills to save for time-sensitive goals in the near term, Gerrety said. A cautious approach Some advisors are offering clients a combination of upside exposure and downside protection. Tom Balcom, CFP and founder of 1650 Wealth Management in Lighthouse Point, Florida, has used custom market-linked notes to hedge clients’ exposure to the market. The notes are tied to stocks and offer a buffer against losses, along with the opportunity to capture appreciation that can be subject to caps. “In 2022, the markets sold off and our clients lost money, but not nearly as much as stock and bond investors lost that year,” Balcom said. “We use them to keep clients in volatile times.” Retail investors can access something similar in the form of buffer ETFs , which use options to provide investors with some protection against market losses. Though buffer funds may make sense for individuals who are approaching retirement, they will need to be comfortable with missing out on runaway rallies, and they should understand the fees tied to these products, which can weigh in around 0.75% to 0.8%, according to Morningstar.
