The change in leadership in the U.S. stock market this year is just the start of a new long-term trend that investors should embrace in 2023, according to Bank of America. ETF strategist Jared Woodard said in a note to clients on Thursday that the shift away from high-growth sectors like tech, combined with higher interest rates, will continue to overturn the investing playbook from the last decade. “We expect the $70 trillion of growth stocks/government bonds created in the context of low inflation and interest rates will have to adjust sharply to a new regime of higher inflation and rates. The pain for ‘new’ economy sectors has likely just begun,” Woodard wrote. Woodard’s team selected the top ETFs to adjust portfolios in 2023 to take advantage of these broader trends. Shifting your portfolio One way to lower the relative exposure to tech stocks is to buy equal weighted index funds, such as the Invesco S & P 500 Equal Weight ETF (RSP) . The outperformance of tech stocks in the last 10 years gave them a disproportionately large weighting in the S & P 500, meaning that they can drag down the index even if many other stocks are doing well. “An equally-weighted S & P 500 index is underweight tech and communication services by nearly 15 percentage points, offering investors an option to stay invested in U.S. equities while mitigating valuation and concentration risks,” Woodard wrote. Investors can also add sector funds containing old economy names, like the SPDR funds for energy (XLE) and mining (XME) , to boost their exposure to those areas. Another option is to shift away from large cap stocks in general with a small cap value fund like the Vanguard Small-Cap Value Index Fund (VBR) . “The past two decades of large cap growth outperformance have been an anomaly. An investor who bought $100 of small cap value in 1926 would have over $36 million today, compared to just $0.8 million from a similar investment in large cap growth,” Woodard wrote. The hunt for income Another area to focus on could be dividends as investors look for reliable payouts at a time when stock price returns could be more muted. “Annual dividend growth averaged 6.2% between 1970 and 1980 after an overvalued, concentrated market corrected sharply,” Woodard wrote. “Price returns only averaged 3% per year over the same decade. Similarly, dividends grew by 6.2% on average between 2000 and 2007 while annual price returns averaged just 2.5%,” Woodard wrote. One dividend fund that Bank of America recommended was Vanguard High Dividend Yield Index Fund (VYM) . The fund’s exposure to groups such as financials and consumer staples makes it more attractive than some other dividend funds, Bank of America said. Investors can also find income through fixed income funds. Bank of America recommended the iShares Fallen Angels USD Bond ETF (FALN) , which consists largely of bonds rated BB, or just one level below investment grade. — CNBC’s Michael Bloom contributed to this report.
These are top ETFs to play changing market leadership in 2023, Bank of America says
