If you’re worried that the artificial intelligence (AI) stock boom is on the verge of a sharp reversal, protecting the gains in your ISA or Self-Invested Personal Pension (SIPP) should be a top priority. No one wants to see their hard-earned wealth wiped out overnight.
Here, I’m going to highlight two ‘defensive’ ETFs that could help investors diversify their portfolios away from AI. If you’re worried about tech sector weakness, I reckon these products are very much worth considering.
A great hedge against AI
First up, we have the Xtrackers MSCI World Health Care UCITS ETF (LSE: XDWH). This provides broad, global exposure to the healthcare sector.
This product has several things going for it from a risk-management perspective. One is that there’s absolutely no exposure to hyperscalers or chip stocks (which are very prominent within global index funds).
With this fund, the top holdings are Eli Lilly, Johnson & Johnson, Abbvie, Merck & Co, and Unitedhealth Group. By contrast, the top holdings in a global index fund are likely to be Nvidia, Apple, Microsoft, Amazon, and Alphabet.
Another is that it’s focused on a defensive sector. No matter what’s happening in the economy or stock market, people are going to need medicines and vaccines.
Given the healthcare sector’s defensive attributes, it often holds up better than many other sectors when the stock market is experiencing turbulence. When other sectors are tanking, institutional investors tend to gravitate towards this sector for safety (we saw this play out this week).
Given its focus, I see this ETF as a great way to hedge a portfolio away from AI risks. I’ve personally made it a large holding within my own SIPP just in case tech stocks do experience a sudden meltdown.
The sector-specific focus does create some risks, of course. But as part of a diversified portfolio, I see it as a bit of a no brainer. Note that over the last five years, it has returned about 70%.
Blue-chip UK stocks and dividend income
Another ETF that could provide some protection from an AI-related crash is the iShares UK Dividend UCITS ETF (LSE: IUKD). This offers exposure to 50 of the highest-yielding dividend stocks in the FTSE 350 index.
At present, the top holdings are British American Tobacco, Legal & General, BP, NatWest, and Aviva. So again, no hyperscalers, chips, or other AI stocks to be seen here.
Now, to my mind, this product isn’t as defensive as the healthcare ETF. Because many of its holdings are cyclical. Whether its oil companies such as BP and Shell, or banks such as Lloyds and HSBC, these are cyclical businesses. In a downturn, they could experience weakness.
That said, this ETF could certainly provide protection against an AI-specific meltdown. Its top holding, British American Tobacco, is about as far away from an AI stock as you can get.
Meanwhile, there’s a dividend yield of nearly 5% on offer. This could help to offset any weakness in share prices. Overall, there’s a lot to like. I’m considering adding it to my ISA or SIPP in the near future for a bit of extra diversification.
Should you invest £5,000 in iShares UK Dividend UCITS ETF right now?
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Edward Sheldon owns shares in the Xtrackers MSCI World Health Care UCITS ETF, Nvidia, Apple, Microsoft, Amazon, and Alphabet.
