Risks Abound, and Investors Need an Assist. It’s Time for Active Funds.

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Diversification—it’s one of the few core investing tenets that even novice investors have embraced. The investing ideal of cheap diversification has driven the decadeslong boom in index investing. And, for the most part, it has served investors well.

But what happens when the index isn’t actually diversified? The S&P 500 is generally considered to be the best proxy for the U.S. stock market. It represents about 80% of all U.S. stocks, and it is capitalization-weighted, just like the market itself. That means the largest stocks make up a bigger portion of the index. Today, the five largest companies—

Apple

(ticker: AAPL),

Microsoft

(MSFT),

Amazon.com

(AMZN),

Facebook

(FB), and

Alphabet’s

Google (GOOGL)—make up 22% of the

S&P 500.

That isn’t diversified. Putting more than a fifth of your assets into five stocks isn’t diversification—and putting more than a fifth of your assets into five technology stocks is even less so. This isn’t a new phenomenon, and Barron’s has warned about the risks the tech megacaps pose to many portfolios, especially the $4.6 trillion that sits in S&P index funds. But the Big Five are showing some early signs of weakness, and those risks may be coming to bear soon, says Barron’s associate editor Reshma Kapadia.

So what’s an investor to do? Reshma has you covered: She found five actively managed mutual funds that own none or very little of the tech megacaps. And while that has hurt recent performance, these funds have terrific long-term track records and could serve as a good hedge if the giants start to stumble.

Read the Rest of the Funds Quarterly

Reshma also dove into another area where active management looks more promising than index investing—China. There is a lot of opportunity for investors in China, but it isn’t a place to go it alone. She found a few great funds that will serve as good tour guides.

Sustainable investing has been a huge and steady trend in recent years; nearly a quarter of all fund flows last year went into sustainable funds. That’s a lot, but the floodgates are about to open. The Biden Administration has sanctioned the inclusion of sustainable funds in 401(k) and other workplace retirement plans, where the vast majority of Americans do their investing. Leslie Norton lays out what this means and what to expect here.

Finally, Evie Liu speaks with Meb Faber, who runs Cambria Investment Management, an actively managed ETF shop. He’s often on the other side of the interview in his popular eponymous podcast. He talks about his investing strategy for this economic environment, what the biggest risks to investors are, and some fascinating bits of financial history.

What are you most worried about when it comes to your financial health? Let me know—I’d love to hear from you.

Write to Beverly Goodman at beverly.goodman@barrons.com