Investment Strategy: AI Trade Unwinds, 3 Sectors Outperform S&P 500

FinanceTop Investment Strategist: 3 sectors BEAT the S&P 500 as the AI trade UNWINDS!

TL;DR

As semiconductor and AI stocks face correction due to unsustainable expectations and massive leverage exposure, healthcare, energy, and financials are emerging as better-performing alternatives that offer diversification and lower correlation to tech.

Key Takeaways

1Semiconductor ETF trading volume exploded from $4 billion to $40 billion per day since ChatGPT launch, indicating frenetic investor behavior similar to past market tops rather than a sign of a genuine new era.
2Leveraged ETFs represent only 1.5% of total ETF assets but account for 15-20% of daily trading volume, with most exposure concentrated in NASDAQ 100 and individual semiconductor stocks like Micron and Nvidia, creating vulnerability to mechanical selloffs.
3High-beta tech stocks and semiconductors are in their top decile performance historically, while low-volatility factor ETFs like SPLV (which holds only 1 tech stock) are negatively correlated to the S&P and can serve as portfolio hedges during tech corrections.
4Healthcare sector has shrunk from 16% to 8% of the S&P 500 over three years as investors exited, creating a contrarian opportunity especially in biotech names beyond just Eli Lilly (15% of sector) and J&J.
5Energy's beta to the S&P has turned negative, making it function as a diversifier and hedge despite representing only 3% of the index, with oil and commodity exposure benefiting from deglobalization trends.
6Financial sector ETFs show strong price performance but lukewarm flows, indicating institutional underexposure with potential catalysts in M&A activity, IPO rebounds, and regional bank strength—areas retail investors typically overlook.
7Small-cap stocks experienced their first outflows in 2025 (first since 2011) and are gaining momentum after larger AI-related names graduated from the Russell 2000 index during June rebalancing, suggesting continued strength if regional banks and biotech remain strong.

Notable Quotes

“Semiconductor ETFs are averaging about $40 billion traded per day. When ChatGPT was released, that number was four. So a tenfold increase in dollar volume in the last couple of years.”
— Todd Sone

“Leverage is not supposed to be bought for the long run. It's meant to be held day-to-day, but when you get a V-bottom accompanied by stimulus and you get rallies that go up 1-3% per day, that's when leverage really comes in handy.”
— Todd Sone

“If you're down 20%, you're going to need more than a 10% day to get back to even. You may get lucky, but more often than not, it's really hard for these things to come back from the dead.”
— Todd Sone

“Healthcare is like the boycott wolf—it's been off the field for better part of three years, going from 16% of the S&P to 8% of the S&P. That's the type of move where people got very bearish and threw in the towel.”
— Todd Sone

Chapters

1. Semiconductor Valuations and Market Frenzy

Semiconductor ETFs average $40 billion in daily trading volume (a 10-fold increase from $4 billion when ChatGPT launched), indicating extreme investor emotion and frenetic behavior similar to past market bubbles like ARK Innovation ETF in 2020.

2. Leverage and Mechanical Risk in Tech

Leveraged ETFs with only $200 billion in assets ($500 billion notional) but driving 15-20% of daily market volume are disproportionately concentrated in NASDAQ and semiconductor names, creating systemic selloff risk when these holdings decline.

3. High Beta Exposure at Extremes

High-beta and high-volatility stocks are at top decile performance levels historically, signaling the need for hedges through low-volatility factor ETFs like SPLV, which holds minimal tech exposure and trades inversely to the broader S&P 500.

4. Healthcare as Contrarian Play

Healthcare's weight in the S&P fell from 16% to 8% over three years as capital fled the sector, but biotech names like Eli Lilly (15% of healthcare sector) have worked, creating opportunity in equipment and provider names that remain overlooked.

5. Energy Sector Negative Beta Opportunity

Energy's beta to the S&P has flipped negative, making it a genuine hedge alongside commodities and natural resources; despite being only 3% of the index, it benefits from deglobalization trends bringing resources back to home countries.

6. Financials Underinvested Despite Strength

Financial sector ETFs trade at new highs but show lukewarm inflows despite booming M&A activity, IPO volume, and strong bank earnings, indicating retail underexposure; regional banks in particular are emerging as stock picks from professional investors.

7. Small-Cap Revenge After Massive Outflows

Small-cap ETFs experienced their first annual outflows in 2025 (first since 2011) before rebounding; the Russell 2000 rebalancing in June graduated mega-cap AI names like Bloom Energy, positioning remaining small caps for continued strength if regional banks and biotech hold.

8. Rotation Away from AI Winners

Equal-weight S&P 500 has outperformed cap-weighted as semiconductors (down to ~19% from peaks) and tech (near 40%) correct, confirming a rotation into boring, low-correlation sectors like utilities, consumer staples, insurance, and non-AI healthcare.

9. Government Support as Market Wildcard

The Trump administration views the stock market as a scoreboard and is heavily invested in AI and infrastructure buildout, creating a potential stimulus or government stake scenario in companies like Intel or rare earth mineral firms that could act as a bull market driver.

10. Portfolio Diversification Strategy for Young Investors

Young investors conditioned by the COVID rebound and AI bull market underestimate diversification value; adding low-volatility, non-correlated holdings (the 'sprinkler system') provides downside protection without requiring market timing, particularly with equal-weight indices and factor-based ETFs.

Key People & Entities

Todd Sone: Investment strategist at Strategus Asset Management; expert on sector rotation, leverage dynamics, and factor-based investing
Ryan Ginky: Colleague of Todd Sone at Strategus; cited for analysis on tech earnings deceleration and peak profit margins
Eli Lilly: Pharmaceutical company and dominant healthcare holding; largest component of healthcare sector (15% of the sector), beneficiary of GLP-1 weight loss drugs
Strategus Asset Management: Investment firm led by Todd Sone; manages ETFs and provides sector rotation and market strategy research

Glossary

Beta: A measure of how much a stock or portfolio moves relative to a market index; high beta (e.g., 1.5) means the stock moves 50% more than the market in both directions.
Leverage ETF: An exchange-traded fund that uses derivatives to amplify returns (typically 2x or 3x) of an underlying index on a daily basis, designed for short-term trading only.
Low-Vol ETF: An ETF that selects stocks with historically low volatility relative to the broader market, seeking a smoother ride with less price fluctuation.
Factor ETF: An ETF based on specific investment factors (momentum, value, growth, quality, profitability, or low volatility) rather than market-cap weighting.
Drawdown: The peak-to-trough decline in an investment's value; semiconductors historically experience 50-60% drawdowns.
Equal-Weight Index: An index where all component stocks receive the same weighting regardless of market capitalization, creating exposure to smaller index constituents.
Negative Correlation: Two assets that move in opposite directions; energy now has negative correlation to tech stocks, meaning they tend to rise when tech falls and vice versa.
Russell 2000: A stock market index comprising roughly 2,000 small-cap U.S. companies; it undergoes annual reconstitution in June that moves companies up or down based on market cap.
Deglobalization: The reversal of globalization trends; countries bringing supply chains and resources back domestically rather than relying on international trade.

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