The current economic landscape highlights the growing uncertainty that investors are facing. From AI bubble concerns, worries about U.S. asset prices being overvalued to persistent economic and geopolitical frictions, diversification has become essential for investors looking to protect and balance their portfolio.
In this context, increasing exposure to global equities can be a sound strategy. The S&P World Index, which tracks the performance of stocks from 24 developed economies, has risen 17.30% over the past year and 0.76% month to date.
Wall Street has long been wary about a potential bubble in the AI sector. The Bank of England and the IMF, as quoted on CNBC, joined the growing chorus, warning that global markets could stumble if the AI boom loses momentum. Per IMF chief Kristalina Georgieva, according to the CNBC article, U.S. tariffs and sky-high stock valuations are further warning signs.
If your portfolio is largely invested in ETFs tracking broad U.S. market indexes such as the S&P 500, you are, directly or indirectly, heavily exposed to the information technology sector, particularly in the “Magnificent 7” tech leaders.
If the AI-driven stock market bubble bursts, heavily tech-reliant investor portfolios may suffer significant losses, which makes diversifying beyond tech funds and companies a smart play. With roughly 35% of the S&P 500 allocated to information technology, managing concentration risk and ensuring proper diversification become crucial when constructing a balanced portfolio.
According to BBC, JPMorgan Chase CEO, Jamie Dimon, warned of an elevated risk of a significant U.S. stock market correction over the next six months to two years, as quoted on Reuters.
Per LSEG Lipper data, as quoted on the abovementioned Reuters article, global short-bias funds attracted $3.7 billion in September, marking the largest monthly inflow in almost three years, with U.S. funds accounting for $2.2 billion of the total. This underscores investors’ increasing concern, as they position themselves for a potential market pullback amid valuation worries.
Markets are now anticipating two additional rate cuts in 2025, following the Fed’s first reduction in September, adding to the appeal of global equities. According to the CME FedWatch tool, markets are anticipating a 94.6% likelihood of an interest rate cut in October and a 99.4% likelihood of a rate cut in December.
Additionally, the greenback’s value tends to move inversely with interest rate adjustments by the Fed. A weakening greenback further boosts interest in global equity funds. According to TradingView, the U.S. Dollar Index (DXY) has fallen 1.43% over the past six months and 8.46% year to date.
Adding international equity ETFs can broaden geographical exposure and strengthen overall diversification. Additionally, investing in international equity ETFs could also potentially boost risk-adjusted returns.
Dimensional International Core Equity Market ETFDFAI has double-digit exposure to Japan (22.62%), the U.K. (12.6%) and Canada (11.75%).
Avantis International Equity ETFAVDE has double-digit exposure to Japan (21.34%), the U.K. (12.18%) and Canada (11.4%).
Schwab International Equity ETFSCHF has double-digit exposure to Japan (21.13%) and the U.K. (12.55%).
Those willing to take on slightly more risks can increase their exposure to emerging market ETFs, unlocking the potential for higher returns. Investors can look at funds like iShares Core MSCI Emerging Markets ETF IEMG and Vanguard FTSE Emerging Markets ETF VWO.
Per LSEG data, as quoted on Reuters, global investors are shifting their focus toward non-U.S. “value” stocks, with $152 billion pulled from U.S. growth funds in the first nine months of 2025. Per the Reuters article, investors anticipate non-U.S. “value” and small-cap equities to gain from overseas rate cuts, stronger fiscal stimulus and more attractive valuations.
As global value funds attract increasing inflows, investors could look at these ETFs to expand their exposure. Dimensional International Value ETF DFIV, Cambria Global Value ETF GVAL, iShares MSCI EAFE Value ETF EFV and Avantis International Small Cap Value ETF AVDV can be considered.
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iShares Core MSCI Emerging Markets ETF (IEMG): ETF Research Reports
Vanguard FTSE Emerging Markets ETF (VWO): ETF Research Reports
Schwab International Equity ETF (SCHF): ETF Research Reports
iShares MSCI EAFE Value ETF (EFV): ETF Research Reports
Cambria Global Value ETF (GVAL): ETF Research Reports
Avantis International Equity ETF (AVDE): ETF Research Reports
Avantis International Small Cap Value ETF (AVDV): ETF Research Reports
Dimensional International Core Equity Market ETF (DFAI): ETF Research Reports
Dimensional International Value ETF (DFIV): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).
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