As we approach the final month of the year, I have been reviewing my core ETF allocations and I wanted to open a discussion on sector rotation heading into Q1 2026.
We all know the growth narrative has pulled the major indices like SPY and QQQ to incredible heights this year. However, looking at the underlying breadth, the risk to reward ratio feels increasingly unfavorable for new capital deployment at these levels. The divergence between the market-cap weighted S&P 500 and the equal-weight version (RSP) is sitting at a historical extreme. To me, this suggests the broader market is not as robust as the headline numbers imply.
My main concern right now is institutional rebalancing. As funds look to lock in performance before the books close for the year, we might see a significant rotation out of the crowded mega-cap tech names and into lagging sectors.
I am personally planning to trim my exposure to pure growth ETFs starting next week. I am looking to reallocate that liquidity into dividend growth funds like SCHD or VIG to lower the portfolio beta. I am also keeping a close eye on Small Caps (IWM) as a potential mean-reversion play if yields stabilize.
How are you guys positioning your baskets for the new year? Are you holding your heavy tech allocations, or are you also shifting into value and bonds to preserve capital?
It feels like everyone is on the same side of the boat right now, which usually warrants caution. Let's discuss.
We all know the growth narrative has pulled the major indices like SPY and QQQ to incredible heights this year. However, looking at the underlying breadth, the risk to reward ratio feels increasingly unfavorable for new capital deployment at these levels. The divergence between the market-cap weighted S&P 500 and the equal-weight version (RSP) is sitting at a historical extreme. To me, this suggests the broader market is not as robust as the headline numbers imply.
My main concern right now is institutional rebalancing. As funds look to lock in performance before the books close for the year, we might see a significant rotation out of the crowded mega-cap tech names and into lagging sectors.
I am personally planning to trim my exposure to pure growth ETFs starting next week. I am looking to reallocate that liquidity into dividend growth funds like SCHD or VIG to lower the portfolio beta. I am also keeping a close eye on Small Caps (IWM) as a potential mean-reversion play if yields stabilize.
How are you guys positioning your baskets for the new year? Are you holding your heavy tech allocations, or are you also shifting into value and bonds to preserve capital?
It feels like everyone is on the same side of the boat right now, which usually warrants caution. Let's discuss.