Bryan Armour: I asked ChatGPT what the most popular business topics were of late, and at the top of the list was artificial intelligence, which may have been a biased answer. Regardless, AI is reshaping our world and our portfolios, whether we like it or not.
The profit potential of AI companies is astronomical, but so too are the prices being paid for them. Look no further than the Morningstar Global Markets Index, a collection of 7,500 companies worldwide. At the top of the list, with over 4% of the total global portfolio, is Nvidia NVDA, a company best known for its GPUs used to train AI models. Over 22% of the value of the global public companies sits with 10 companies, all of which are in the high-stakes chase for either the best AI model, the best chips for AI models to run on, or the best way to get AI technology into people’s hands.
Investors clearly have a lot riding on AI, perhaps too much. That’s why I will give you three ETFs to pare back on AI exposure without ignoring it completely.
3 ETFs for Diversifying Beyond AI
- Schwab Fundamental U.S. Large Company ETF FNDX
- Dimensional US Targeted Value ETF DFAT
- JPMorgan International Research Enhanced Equity ETF JIRE
First on my list is Schwab Fundamental U.S. Large Company ETF, ticker FNDX. The quickest way to ground a portfolio built on high hopes is to tie its holdings and their weights to fundamentals rather than market prices, which is exactly what FNDX does.
It targets large- and mid-cap US stocks and weights its holdings based on sales, cash flows, and dividends plus buybacks. When the fund rebalances, it sells exposure to companies whose prices rise relative to their fundamentals, while adding exposure to those that have become cheaper relative to those metrics. This contrarian approach limits FNDX’s exposure to companies with high growth expectations. In fact, both Nvidia and Tesla TSLA collect less than 0.5% each of the portfolio.
FNDX’s grounded investing approach has worked so far. Over the past 10 years, it has earned an annualized return of 13%, good enough to fall in the top 5% of funds in the large-value Morningstar Category.
Second on my list is Dimensional US Targeted Value ETF, ticker DFAT. Investors happy with their core US stock exposure may prefer to augment it with an ETF that gives them something different.
DFAT does that by focusing on the cheaper half of US mid- and small-cap stocks in a cost-effective way. You won’t find Nvidia or Tesla in this portfolio. Instead, it spreads its investment over 1,400 companies with just 6% concentrated in its top 10 holdings. It excludes the least profitable companies and weights those that make the cut by market cap, giving it a cost-conscious approach that is unlikely to overpay for speculative growth prospects.
Its track record has proved its long-term edge. DFAT’s mutual fund sibling outperformed the Russell 2000 Value Index by 2 percentage points annualized over the decade through December 2024.
Last on my list is JPMorgan International Research Enhanced Equity ETF, ticker JIRE. Investing outside the US alone can blur the focus on AI, but this ETF combines that with a bottom-up fundamental research process to find companies trading at enticing prices.
This active ETFs approach is well-engineered and effectively executed. It combines elements of index and quantitative active investing to enhance returns relative to its benchmark. This ETF holds MSCI EAFE stocks, then tilts toward companies that J.P. Morgan analysts like and steers away from those it doesn’t. Stock-picking is the main driver of relative returns, but this ETF is intended to closely track the MSCI EAFE Index, so returns should be similar.
Indeed, JIRE has edged out EAFE Index-tracking peers by a few percentage points total since its 2022 inception.
Stay tuned for more picks, and be sure to check out our ETF research page at Morningstar.com/topics/etfs. See you next time.
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