Is it wise to limit your exposure to US tech stocks?

Both international trackers and US funds would be shaken if the AI boom ended

One strategy to reduce exposure to US tech stocks is as follows.

We should be cautious about drawing hasty conclusions about the AI boom because it would be a complete coincidence if it ended in a bust on the 25th anniversary of the .com bubble's collapse. Humans are adept at spotting patterns where none exist, and certain eventssuch as significant anniversaries and round numberstend to set that off. Subconsciously, many of us search for indications of a collision.

Nevertheless, markets are braced more than they have been in a long time. Specifically, they are more uneasy than they were in 2022, when sharply rising interest rates gave investors a compelling reason to restructure their holdings. More sentimental in nature, the most recent changes may make investors wonder if they should place such a high value on American exceptionalism.

Between now and 2000, there are some reassuring distinctions. In contrast to profitable .com stocks, today's biggest stars have been massive companies with strong cash generation and high profitability (though it's important to remember that it wasn't just online pet stores back then; there was a lot of hype surrounding successful companies like Cisco, which have never regained their all-time highs). The drawback is that markets are now heavily reliant on these behemoths.

Worldwide focus.

According to research by Elroy Dimson, Paul Marsh, and Mike Staunton published in the annual UBS Global Investment Returns Yearbook, the US market has been at its most concentrated for ninety-two years. The market value of the top ten stocks now makes up 35% of the total. In turn, America controls the world's markets: US-listed stocks make up nearly 65% of the world's total capitalization, the highest percentage since the end of World War II. Because the US accounts for 73% of the MSCI World index, investors who own a global tracker or a fund benchmarked against one exposure may have a higher exposure.

To keep things in perspective, even though the level of concentration is high, it appears most extreme when you only look at the last 50 years or so. From the 1940s through the early 1970s, the US market dominated international markets to a similar degree, and it remained relatively concentrated in a small number of stocks until the middle of the 1960s. This degree of concentration might seem reasonable if you think US-listed companies will continue to dominate the world economy. Even so, the US market is worth more than most others, and growing trade tensions around the world raise the possibility of a more fragmented world that might not be as advantageous for US multinational corporations.

In contrast to a global tracker, the BFIA exchange-traded fund (ETF) portfolio has equal proportions in the US, Europe, Japan, and emerging markets. Since our regular end-of-year review and rebalancing is approaching, we will, however, make one adjustment and replace the Vanguard SandP 500 (LSE: VUSA) with the Xtrackers S&P 500 Equal Weight (LSE: XDWE). The concentration of our US holdings in tech megacaps is decreased by equal weighting stocks. By making this adjustment, we will return the position to its desired weight of ten percent.