Using diversified and factor ETFs to build long-term portfolios in a changing ETF landscape

Smarter ETF Portfolios for 2026

Using Diversified and Factor ETFs to Build Resilient Long-Term Portfolios in a Changing ETF Landscape (2026 Update)

The year 2026 marks a defining moment for investors navigating an ETF universe that continues to evolve at a breakneck pace. Driven by relentless innovation, geopolitical tensions, and macroeconomic shifts, the landscape demands a nuanced, layered approach to portfolio construction. As global ETF assets surpass $13.5 trillion and U.S. inflows hit $1.49 trillion in 2025, it becomes increasingly clear that relying solely on traditional cap-weighted index funds no longer suffices. Instead, investors must embrace diversification across sectors, factors, and themes, while actively managing risks amid a complex, dynamic environment.

The 2026 ETF Environment: Innovation Meets Uncertainty

The ETF market's rapid evolution is propelled by cutting-edge offerings such as granular sector ETFs, bespoke thematic funds, and AI-powered risk management strategies incorporating advanced data modeling. These innovations allow investors to target long-term themes—artificial intelligence (AI), semiconductors, cloud computing, renewable energy, and infrastructure—with greater precision and flexibility.

However, this period is also marked by significant geopolitical turbulence—notably involving China, Taiwan, and supply chain vulnerabilities—that amplifies market volatility. For instance, Nvidia’s CEO Jensen Huang recently hosted a “trillion-dollar dinner” in Taiwan amid escalating tensions, underscoring the strategic importance of semiconductor leadership. Meanwhile, Intel’s resurgence, supported by U.S. government initiatives and breakthroughs such as 18A process chips and Panther Lake architecture, signals a shift in industry dominance beyond traditional giants.

This dual narrative underscores two key themes:

Technological breakthroughs fueling long-term growth and industry leadership shifts.
The overconcentration risk in mega-cap stocks like Apple, Microsoft, Amazon, and Alphabet, especially during AI-driven rallies, highlighting the importance of diversification.

Additionally, supply chain fragilities and ongoing geopolitical upheavals reinforce the need for broad, diversified ETF allocations that capture emerging themes while mitigating concentration risk.

Limitations of Traditional Cap-Weighted ETFs and the Case for Diversification

Core ETFs such as Vanguard VOO, iShares IVV, and SPY continue to serve as foundational holdings due to their low costs (~0.03%) and liquidity. Nevertheless, their heavy weighting in mega-cap tech stocks—over 25% combined—exposes investors to overconcentration risks, especially during periods of sector shifts or market stresses.

Why Diversify Beyond Cap-Weighted ETFs?

Leadership Rotation: In 2025, Broadcom (AVGO) outperformed Nvidia (NVDA), surging approximately 49%, driven by AI hardware expansion and diversified chip portfolios. Analysts now believe Broadcom’s growth potential may surpass Nvidia’s into 2026, illustrating industry leadership shifts that cap-weighted indices may lag behind.
Geopolitical and Supply Chain Risks: Nvidia’s supply chain vulnerabilities, combined with Intel’s technological advances, underscore the risk of overreliance on a few mega-stocks. Diversified ETFs help spread risk and capture multiple growth drivers.

This pattern demonstrates that overconcentration in mega caps can leave portfolios vulnerable to sector shocks and geopolitical disruptions. To build resilient, long-term portfolios, investors should incorporate layered diversification and factor tilts via ETFs that offer exposure to emerging themes while controlling for concentration.

Strategic Portfolio Construction: Embracing Diversification, Sector Tilts, and Thematic Exposure

Navigating the current environment requires layered diversification and strategic factor tilts to adapt to sector rotations and shifting industry leadership.

Core Diversified ETF Strategies

Equal-Weight ETFs (e.g., Invesco S&P 500 Equal Weight ETF - RSP): These reduce mega-cap dominance, providing more balanced sector exposures and demonstrating greater resilience during turbulent periods.
Dividend and Income ETFs (Vanguard Dividend Appreciation (VIG), iShares Select Dividend (DVY), Vanguard High Dividend Yield (VYM)): Focus on stable, income-generating stocks that offer stability amid increased volatility.
Low-Volatility and Small/Mid-Cap ETFs (Vanguard U.S. Minimum Volatility ETF - VFMV, Vanguard VXF): Offer growth potential with reduced risk, ideal for long-term resilience.

Sector and Thematic ETFs Focused on Emerging Trends

AI Infrastructure and Semiconductors: ETFs targeting Nvidia, Broadcom, Taiwan Semiconductor, and Intel enable investors to capitalize on long-term industry growth.
Factor Tilts: Incorporate growth, value, quality, and low volatility ETFs such as Vanguard Growth ETF (VUG) and Schwab U.S. Large-Cap Growth (SCHG) to fine-tune exposures.

Recent Market Insights and Thematic Developments

Nvidia’s Earnings and Leadership Rotation

Nvidia’s recent earnings exceeded expectations, with shares soaring over 150% in 2025. Despite this success, Nvidia faces supply chain constraints and geopolitical scrutiny. Conversely, Broadcom’s 49% rally underscores a leadership rotation, benefiting from its diversified product portfolio and AI hardware expansion—positioning it for sustained growth.

Industry Capital Expenditure and Sector Rotation

Strong capex spending among Taiwan Semiconductor and Intel supports long-term semiconductor growth, despite macroeconomic headwinds. Meanwhile, sector rotation into energy, utilities, and communication services reflects investor reassessment amid macro uncertainties.

Policy and Legal Shocks

The recent Supreme Court ruling on tariffs under IEEPA introduces additional volatility, impacting supply chains and international trade. This legal development emphasizes the importance of diversification and active risk management.

Weekly Market Developments (as of Feb 23, 2026)

The Weekly Wrap Up shows U.S. equities trending upward, with the Nasdaq nearing 7,000, yet persistent volatility persists due to macroeconomic and geopolitical factors. Notably, mid-cap stocks continue outperforming mega caps, signaling ongoing sector rotation and investor caution.

The Changing AI Trade and Portfolio Positioning

A recent video titled “Why the AI Trade is Changing (And How to Position Your Portfolio)” emphasizes that the AI boom is entering a more nuanced phase. Initial excitement centered on Nvidia, but the AI ecosystem now broadens to include semiconductors, cloud providers, AI infrastructure, and enterprise software.

Key strategies include:

Rebalancing exposure across the entire AI value chain.
Utilizing thematic ETFs focused on AI hardware, cloud computing, and data infrastructure.
Recognizing the shift from hype to sustainable growth.
The importance of layered diversification—blending core holdings with thematic and factor ETFs—to manage risks and maximize long-term gains.

This evolution indicates that AI investing is no longer limited to mega caps but involves broader industry participation. Regular portfolio rebalancing and monitoring of earnings, capex, supply chains, and geopolitical risks are vital.

The Broader Macro Outlook: Goldman Sachs’ 2026 Forecast and Implications

On February 26, 2026, Goldman Sachs issued an optimistic forecast: the S&P 500 may rally amid a healthy economy. Their analysis suggests that economic growth remains robust, supported by fiscal spending on infrastructure, AI research, and supply chain resilience.

Implications for ETF allocation and portfolio management include:

Maintaining a higher equity allocation, especially in growth-oriented ETFs like VUG and SCHG.
Periodic rebalancing to capture upside during this rally, while hedging against potential volatility.
Tactical use of thematic and factor ETFs to capitalize on emerging trends and sector rotations.
Active risk management with volatility ETFs and options overlays to protect against downturns.

Given the positive macro outlook, investors might consider gradually increasing exposure to cyclical sectors and growth themes, while keeping a diversified core.

Current Status and Strategic Implications

As of late February 2026, market volatility persists amid macroeconomic uncertainties and geopolitical tensions. The S&P 500 has recently tested 7,000, but sustained gains depend on macroeconomic resilience and policy responses.

Key takeaways for long-term investors:

Continue to prioritize low-cost, broad-market ETFs such as Vanguard VOO or iShares IVV for core holdings.
Use layered diversification strategies—including equal-weight, dividend, low-volatility, and small/mid-cap ETFs—to mitigate concentration risks.
Incorporate thematic ETFs focused on AI, semiconductors, cloud infrastructure, and renewables to capitalize on long-term growth drivers.
Maintain active oversight of earnings reports, capex plans, supply chain developments, and geopolitical updates to rebalance proactively.
Utilize risk mitigation tools like volatility ETFs and options overlays to hedge downside risks.

Conclusion: Building Resilience in a Dynamic Landscape

The 2026 ETF landscape reflects a paradigm shift driven by technological innovation, geopolitical tensions, policy shifts, and industry leadership transitions. To succeed, investors must embrace layered diversification, balancing core broad-market holdings with thematic and factor ETFs, while actively managing risks.

Key strategies include:

Cost-efficient core holdings.
Layered diversification across sectors, factors, and themes.
Active monitoring of macroeconomic, geopolitical, and industry developments.
Risk mitigation using volatility tools and options.

By adopting these principles, investors can navigate turbulence, capture emerging opportunities, and position for long-term growth—building resilient portfolios capable of thriving amid ongoing macroeconomic uncertainties and industry shifts.

In the current environment, adaptability and vigilance remain paramount. With strategic diversification and active management, investors are well-positioned to harness the opportunities of the evolving ETF universe in 2026 and beyond.

Sources (17)