Quick Hits & ETFs: Week of February 3, 2025

NVIDIA's plunge was good for market breadth, dividend stocks rounding into shape and the Trump tariffs are here.

Hello and happy Sunday to everyone!

It seems like there’s a lot to cover based on what happened over just the past week, so let’s jump right into it!

Results Of Last Week’s Poll

Last week, I proposed switching up the format of the Sunday posts. Instead of the original Weekly Market Prep format that I’ve used up to this point, I suggested the idea of switching to a “quick hits” format that would be 1) a little more succinct and to the point and 2) more ETF-focused.

Here’s what I wrote last week:

“Given some current time constraints with other projects, I’m thinking about switching to something that offers some quicker nuggets on the markets and ETFs, similar to what was just done above as well as a top 5 or top 10 ETF list within a category that’s particularly relevant at the moment.

The thinking is that it might be more useful for ETF investors who want more targeted ETF coverage as opposed to the broader market or economy views that are available in so many places nowadays. The top 10 format could also help highlight some under the radar ETFs that may not necessarily be well covered elsewhere in the financial media.”

The results of the poll were very clear. More than 80% of those responding preferred the “quick hits” format.

Therefore, I’m going to begin pivoting to that format going forward. For those who voted for the original format, I won’t be abandoning it altogether. I’ll still incorporate some of that into this new format, but I’ll also try to keep it a bit more conversational and “stream of thought”.

I will say that I was humbled by some of the comments many of you left for me. I genuinely appreciate all of the kind words expressing the value of my work here. It truly does mean a lot and I’ll continue to work hard providing value in each and every post I write. And, of course, keep any ideas you have coming!

There was some useful feedback as well. Some suggested trying to keep a mix of both formats, which I’ll try to do. I had another suggesting that I be more decisive in suggesting winners and losers. I’ll try to do that as well. Another suggested being careful not to just pick or chase the latest hot performers. All of it was read and considered and, again, I genuinely appreciate your thoughtfulness throughout.

With that being said…

Quick Hits For The Week Ahead

A lot happened this week in the markets, tech and politics. If you looked just at the VIX, you might think it was a relatively calm week. Look at the charts or the headlines and you’ll realize it wasn’t.

• The biggest news happened over the weekend with DeepSeek and how it might impact the AI market. You saw what happened to NVIDIA. I won’t repeat what happened since that’s been covered ad nauseam elsewhere, but I will say that I’m skeptical that DeepSeek will have the impact many think it will. Yes, I’ve seen the reports that say it works just as well as ChatGPT and, if it does, that’s fine. What I’m not sure I believe is that it was built entirely with old NVIDIA chips at the cost of just a few million dollars. This is China after all and anything that comes out of the country should be taken with a big grain of salt. Maybe it will ultimately prove to the industry that a high quality GPT can be produced without billions of dollars of investment. Does it mean that DeepSeek will make irrelevant all of the work that the magnificent 7 and other companies have done to this point to advance their AI development? I don’t think so.

• The U.S. Navy has already banned the use of DeepSeek and I don’t think it’s going to end there. Ultimately, I can easily see this going the TikTok route - either ban it, sell it or regulate it. If the U.S. government thinks that Chinese tech is a data security threat, it seems logical that they’d want to block DeepSeek too. The markets reacted as I’d expected they would on Monday and the recovery to recapture some of those losses makes sense. I think we’ll have a period where the industry reevaluates how much investment is really necessary to build out AI capabilities, but I don’t see any kind of ramp down in spending coming. Microsoft and Facebook essentially confirmed that in their earnings reports.

• The one thing that I was encouraged to see this week is that there wasn’t a massive sell-off despite NVIDIA’s 17% decline on Monday. Consumer staples and healthcare were both up more than 2%. Value, low volatility, dividend growth, high yield equities and long-term Treasuries are gained more than 1%. While the VIX hit 21 shortly after the open, it declined throughout the day and actually didn’t spend much time above the mid-teens. All in all, this was a pretty orderly rotation out of big tech. Longer-term, this could actually be a positive. If market breadth improves and volatility remains contained, it could lead to long-term gains across a wider swath of the market.

• Let’s take a closer look at disruptive tech ETFs, which includes cloud computing, cybersecurity, AI and robotics. The biggest losses happened in funds, such as the Roundhill Generative AI & Technology ETF (CHAT) and the Defiance Connective Technologies ETF (SIXG), but the damage was relatively limited beyond that.

source: ETF Action

• Semiconductor ETFs were down big, led by NVIDIA, but the WisdomTree Cloud Computing ETF (WCLD), the Global X Cybersecurity ETF (BUG), the ALPS O’Shares Global Internet Giants ETF (OGIG) and the Invesco Nasdaq Internet ETF (PNQI) were all up more than 2% on the week. Bottom line: If you were concentrated in your portfolio, it was probably a rougher week. If you were diversified, you probably did much better.

• The Fed held rates steady this week, which was expected and we’re still looking at 1-2 cuts by the end of this year. I’m not terribly bullish on long bonds right now. With a lack of Fed cutting and inflation at least stuck if not rising, I think rates could head higher before they head lower. Plus, Trump decided to implement tariffs on Canada, Mexico and China this weekend. Those are inflationary, although the effects won’t be experienced immediately, but I still wouldn’t be taking duration risk here.

• International stocks are still holding up here and looking positive. Europe actually looks encouraging, but any recovery should be treated as delicate. The ECB should keep delivering rate cuts.

Dividend Landscape

Dividend stocks performed MUCH better than the broader market. Healthcare was the top-performing sector in January, which is a strong sign for 1) dividend ETF outperformance and 2) a defensive undertone to the market in general. If healthcare continues to lead, I’d be worried about holding a tech-heavy portfolio. Utilities are generally considered the most conservative of the S&P sectors, but healthcare, I’ve found, does the best job of measuring overall market sentiment. Consumer staples are also making a comeback - good for dividends, bad for the overall market.

source: ETF Action

There’s a general trend towards dividend growth outperforming high yield so far in 2025, even though the Vanguard High Dividend Yield ETF (VYM) is the best performer so far out of this group. The one ETF I’m sure a lot of people are watching is the Schwab U.S. Dividend Equity ETF (SCHD). Unfortunately, it’s been a dud for most of the past two years and hasn’t gotten off to a much better start this year. The quality factor just hasn’t been helping, nor has the heavier tilt towards high yielders.

Note: Check out my 2025 outlook for SCHD HERE.

Top 10 List

Keeping on the dividend theme, the list of top performers for January includes a lot of probably unfamiliar names, but there is one thing that stands out.

source: ETF Action

Two of the ETFs on this list (yes, there are 12, not 10) - the Cambria Large Cap Shareholder Yield ETF (LYLD) and the iShares Core Dividend ETF (DIVB) - both look at shareholder yield as opposed to pure dividend yield in their selection criteria. Shareholder yield includes both dividends and buybacks. The latter of those two criteria is likely going to become a bigger focus by corporations as opposed to just dividends and it might be a wise idea to give these funds a longer look.

The difference between 2024 and the early going of 2025 is the sheer number of dividend ETFs that have outperformed the S&P 500. The composition of market gains has been much different and that alone bodes well for the group going forward. If tariffs remain in place indefinitely and/or get more stringent, I could see further rotation into more defensive equities as tech valuations get squeezed.

Looking Ahead

Looking better for: TIPS, dollar, magnificent 7

Looking worse for: industrials, dividends, small-caps

If you have any more thoughts, feel free to jump into the comments below!