Dividends, Gold, ETFs: Wall Street Outlines 5 Steps to Protect Your Portfolio from AI Risks

Strategists and portfolio managers at BlackRock and ClearBridge Investments warn that traditional safe-haven assets are becoming less effective at hedging against AI-related risks, according to the research firm Morningstar. The focus on artificial intelligence now drives the performance not only of tech stocks but also of securities from other sectors and even bonds, making it difficult to avoid. Not even passive investing offers a solution: an investor who simply puts money into an S&P 500 index fund is investing 45% or more of their capital in AI—whether they want to or not, according to Interactive Brokers strategist Steve Sosnik. Morningstar has compiled five ideas from Wall Street professionals on how to protect a portfolio from this skew:

1. Look for indirect benefits from AI. Traditional alternatives to the tech sector may no longer protect your portfolio, warns Michael Klarfeld, a portfolio manager at ClearBridge Investments. Energy and utility companies are now linked to big tech firms through the construction of data centers. Olaolu Aganga, head of portfolio construction at Citi Wealth, favors stocks of cybersecurity solution providers, as well as steel and copper suppliers for power grids: the latter have other sources of demand besides AI.

2. Focus on quality, not sector. BlackRock strategist Christie Akullian advises against increasing the weight of individual sectors in a portfolio; instead, she recommends keeping the portfolio’s composition close to that of the broader market and selecting stocks of companies with high profitability, stable earnings, and a strong balance sheet. Clarfeld of ClearBridge considers the stocks of elevator manufacturer Otis Worldwide, insurance broker Marsh, and aerospace equipment manufacturer Honeywell Aerospace to be attractive: they are relatively inexpensive and have little to do with AI.

3. Dividends Instead of Capital Expenditures. When investing in AI companies, investors are paying for profits that those companies are expected to generate years or even decades down the line; therefore, when interest rates rise and doubts arise about the prospects for AI, their stocks lose value, explains Akullian. She considers dividend-paying stocks to be a counterbalance: “Dividends are, almost by definition, a way to hold shares in companies that don’t spend too much on capital expenditures. Instead, they return money to shareholders.” This year, such stocks are outperforming the market: the Morningstar Dividend Leaders index has risen by more than 19%, while Morningstar’s index of the entire U.S. stock market has risen by 13%.

4. Invest in bond ETFs. Strategists believe that bonds now offer less protection against AI risks than they used to. According to Akullian of BlackRock, hyperscalers—the largest cloud companies that are borrowing billions for AI infrastructure—have recently accounted for one-third of new issuances of long-term investment-grade bonds. Nevertheless, Morningstar analyst Daniel Sotiroff considers ETFs that track the broad bond market to be a good way to diversify: they are “less volatile than stocks, and their yields are more attractive than they have been in recent years.”

5. Gold and Alternative Strategies. Agange of Citi likes gold: it can serve as a bond substitute in a portfolio and generate returns that are uncorrelated with the rest of the market. Akullian of BlackRock adds that through mutual funds and ETFs, investors also have access to alternative strategies—such as those used by hedge funds, or simultaneous bets on the rise of some stocks and the fall of others. According to her, the returns on such instruments may not depend on market movements.

According to Apollo Global Management, AI accounted for nearly half of all investment-grade bond issuance this year. In a JPMorgan Chase study, four model portfolios—with asset allocations similar to those of pension funds and endowments—have shown a strong positive correlation with AI risk factors in recent years.

This correlation does not prove a causal relationship, but it does indicate that AI has a strong influence even on broadly diversified portfolios, Bloomberg reported in September. Investments in AI have been highly profitable for most of the past two years: the Bloomberg Intelligence index, which tracks the stocks of AI-related companies worldwide, has outperformed the broader market by an average of 11 percentage points per year, the agency noted.

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