Investors are facing a period of historically high concentration in the S&P 500 Index headed into 2026, with a small number of mega-cap technology and AI-related companies dominating the index’s performance and risk.

That’s leading more investment managers to advise clients as part of an annual portfolio review process to pay extra attention to opportunities to broaden holdings within the U.S. market, and across both value and overseas stocks.

“The big theme for us is making sure we have resiliency built into the portfolio and the way we are going about that is diversification,” Kathmere Capital Management chief investment officer Nick Ryder said on CNBC’s “ETF Edge” on Monday.

He expressed concern that investors remain too concentrated in the “Magnificent 7” stocks, which currently make up about 35% of the U.S. large-cap stock market index.

“It has been an awesome run for these companies, but let’s just make sure the portfolios are sufficiently diversified outside the mega-cap growth segment, also outside of U.S. equity companies,” Ryder said.

He’s not alone in advising investors to diversify away from the Mag 7.

Ed Yardeni, Yardeni Research president, said investors should be underweight the Mag 7, but overweight the “Impressive 493” during a “Squawk Box” interview earlier this week.

He was referring to the remaining 493 S&P 500 stocks.

During the “ETF Edge” podcast portion of Monday’s show, Ryder pointed to the many equal-weight S&P 500 ETFs as a good way to stay invested in the U.S. market but reduce the top holdings’ concentration risk.

The Goldman Sachs Equal Weight U.S. Large Cap Equity ETF (GSEW) is one example. The fund has attracted $397 million in flows since the beginning of the year, according to ETF.com. Though to put that into perspective, the market-weighted Vanguard S&P 500 ETF (VOO) has taken in an estimated $120 billion this year from investors.

Ryder said 2025 has been the rare year when both momentum stocks and value stocks have done very well, but he believes that over the longer-term, owning value stocks is the more important factor as stock prices experience reversion to the mean, and there is still considerable room for value stocks to appreciate, he said.

Within the U.S. large-cap space, another option to consider for diversification is a value fund, Ryder said, such as the Vanguard Value ETF (VTV).

“I don’t want to take a sector bet, but I just want to own the cheaper stocks within each sector,” he said.

But Ryder stressed that investors with a domestic bias should also be aware they have missed out on huge gains from value stocks overseas this year.

“Non-U.S. value is up [around] 40% this year,” he said.

The iShares MSCI Intl Value Factor ETF (IVLU) was up close to 44% year-to-date, through Thursday.

Ryder believes even with those gains, many value stocks remain underpriced. “The discounts on value stocks are pretty significant relative to history,” he said. “It’s axiomatic value is cheaper than the market, but sometimes it’s even more than normal, and we are at one of those times,” he added.

Correction: Nick Ryder is chief investment officer at Kathmere Capital Management. An earlier version of this article included a misspelling of his name.

A key rotation away from artificial intelligence stocks may be underway in the market.

According to Astoria Portfolio Advisors’ John Davi, a broader range of stocks are getting a “green light” because liquidity is returning to the system.

“The Fed cut rates four times last year. They cut rates twice already. They’re going to go again whether its December [or] January,” the firm’s CEO and chief investment officer told CNBC’s “ETF Edge” this week. “Historically whenever the Fed cuts interest rates, usually that’s a turn of a new cycle. Market leadership does tend to change quietly.”

He lists the latest performance in areas ranging from emerging markets to industrials. The iShares MSCI Emerging Markets ETF, which tracks the group, is up 17% over the past six months as of Wednesday’s close. The Industrial Select Sector SPDR Fund is up 9% over the same period.

“I think they can be a good offset to what’s an expensive large cap tech position, which dominates most portfolios,” he added. “We’re living in a structurally higher inflation world. The Fed is cutting rates like, why do you want to take so much risk in just seven stocks?” and

Davi prefers a global balanced approach to investing versus an overweight position in the Magnificent 7 — which is comprised of Apple, Amazon, Meta Platforms, Nvidia, Microsoft, Tesla and Alphabet, which has been trading around all-time highs. The Mag 7 makes up about a third of the S&P 500.

Sophia Massie, CEO of ETF-issuer LionShares, is also wary of going all-in on the AI trade.

“I think analysts have an idea of how much value AI will add to our economy. I don’t think we really understand how that’s going to play out between different companies yet,” Massie said in the same interview. “So, I have this sense that right now, we’re pricing in this probability that… one company may be the one that dominates, dominates AI and ends up being a big player in the future.”

It appears more investors are eyeing dividend stocks ahead of the Federal Reserve’s interest rate decision in September.

Paul Baiocchi of SS&C ALPS Advisors thinks it is a sound strategy because he sees the Fed easing rates.

“Investors are moving back toward dividends out of money markets, out of fixed income, but also importantly toward leveraged companies that might be rewarded by a declining interest rate environment,” the chief ETF strategist told CNBC’s “ETF Edge” this week.

ALPS is the issuer of several dividend exchange-traded funds including the ALPS O’Shares U.S. Quality Dividend ETF (OUSA) and its counterpart, the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF (OUSM).

Relative to the S&P 500, both dividend ETFs are overweight health care, financials and industrials, according to Baiocchi. The ETFs exclude energy, real estate and materials. He refers to the groups as three of the most unstable sectors in the market.

“Not only do you have price volatility, but you have fundamental volatility in those sectors,” Baiocchi said.

He explains this volatility would undermine the goal of the OUSA and OUSM, which is to provide drawdown avoidance.

“You’re looking for dividends as part of the methodology, but you’re looking at dividends that are durable, dividends that have been growing, that are well supported by fundamentals,” Baiocchi said.

Mike Akins, ETF Action’s founding partner, views OUSA and OUSM as defensive strategies because the stocks generally have clean balance sheets.

He also notes  the dividend category in ETFs has been surging in popularity.

“I don’t have the crystal ball that explains why dividends are so in vogue,” Akins said. “I think people look at it as if you’re paying a dividend, and you have for years, there is a sense to viability to that company’s balance sheet.”

One exchange-traded fund is betting on a U.S. manufacturing job resurgence.

Tema ETFs CEO and founder Maurits Pot is behind the American Reshoring ETF (RSHO) that focuses on industrials.

“Some will call it deglobalization. We’re in the early innings,” Pot told CNBC’s “ETF Edge” this week. “At the heart of it is job creation, manufacturing and reshoring — bringing back local manufacturing jobs.”

Pot’s firm launched the American Reshoring ETF in May 2023. Since its inception, the exchange-traded fund is up almost 37% as of Wednesday’s close.

Despite the strong performance, “ETF Edge” host Bob Pisani contends ETFs built around a theme often come and go.

However, Strategas’ Todd Sohn, who tracks the ETF industry, thinks investing in U.S. manufacturing is a sound strategy. He points to the industrial sector’s runway for growth after a vast reduction in size over the past three decades.

“If I am going to play the industrials in a thematic way, I like the route of going active,” the firm’s managing director said. “I do think there is staying power here as opposed to some of the fads we’ve seen in the thematic space — particularly those that are a little more tech and growth oriented.”

The American Reshoring ETF is underperforming the broader market over the past three months, falling more than 4%.

Disclaimer

The Federal Reserve may have new incentives in the second quarter to cut rates deeper this year.

Canaccord Genuity’s Tony Dwyer thinks a deteriorating jobs market and easing inflation will ultimately push the Fed to act.

“I’m not saying that they have to go back to zero, but they have to be more aggressive,” the firm’s chief market strategist told CNBC’s “Fast Money” on Thursday. “One of the most aggressive topics that I talk to clients about is how bad the incoming data is.”

Dwyer contends falling employment survey participation rates are skewing the Bureau of Labor Statistics’ jobs report data. The next monthly jobs reading is due Friday.

“It’s not that they’re manipulating the data. The conspiracy theories go bananas with this stuff. It’s really that they don’t have a good collection mechanism. So, the revisions are significant and most of them have been negative now,” said Dwyer. “Our focus now is those rate cuts are what you need.”

At the March Federal Reserve policy meeting on interest rates, officials tentatively planned to slash rates three times this year. They would be the first cuts since March 2020.

Dwyer expects the rate reduction will give financials, consumer discretionary, industrials and health care stocks a boost. The groups are positive this year.

“Our call is to buy into the broadening theme on weakness rather than simply adding to the mega-cap weighted indices. The top 10 stocks still represent 33.7% of the total SPX [S&P 500] market capitalization,” he wrote in a recent note to clients. “History shows that is historically high and doesn’t last forever.”

According to Dwyer, market performance will become much more even by the end of this year into 2025.