Should I reduce my AI exposure with an equal-weighted tracker fund?

Q: I want to reduce my exposure to artificial intelligence. Should I buy an equal-weighted tracker fund?

A: Lots of investors are thinking about AI at the moment. They want to know whether we are in a bubble and - if so - what to do about it. No one has a definite answer to the first question, but the second one is easier to answer.

If you are a passive investor, you may be very exposed to the world’s biggest technology firms. A global tracker like the Fidelity Index World Fund invests in over 1,000 businesses, but the ‘Magnificent 7’ - Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla - represent almost a quarter of the portfolio. Allocation jumps to a third if you buy a US tracker fund.

This is because stock market indices tend to reflect the size of their constituents. Think of the S&P 500 as a pie chart, with 500 slices representing individual companies. The Nvidia slice is about five times larger than the Walmart slice, as Nvidia’s market capitalisation is about five times bigger. This means that Nvidia wields more influence on the market’s overall performance.

This has fuelled some fantastic results in recent years, as big companies have kept getting bigger. If you are concerned the fortunes of the mega caps will change, however, there is another way to invest.

Equal-weighted tracker funds allocate the same importance to small companies as huge ones. For the S&P 500, this means you get the identical exposure to Nvidia as to CarMax - the index’s smallest business. As such, they are a fuss-free way to scale back Big Tech exposure, and to invest in lesser-held sectors like utilities and healthcare.

Earlier this year, we added the Legal & General S&P 500 US Equal Weighted Index Fund to our list of favourite funds. This is a relatively new fund - it only launched in October 2024 - but it has tracked the underlying index closely. With an ongoing charge of 0.15%, it is also well priced compared to its rivals. 

It is important to note that equal-weighted funds can be more volatile than traditional trackers, as they increase exposure to small companies. They also require regular rebalancing to maintain equal weights, which can increase costs.

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in an ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.