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Welcome to the July Edition of Xtrackers Spotlight!
Artificial intelligence (AI) is reshaping industries, driving earnings, and dominating headlines. But as AI cements its place at the center of modern portfolios, a quieter question deserves attention: are portfolios sufficiently exposed to other sources of return that could complement, diversify and potentially enhance outcomes over the long term?
The AI concentration reality
How much AI do you actually have in your portfolio? For many investors, the answer may be larger than expected. Broad market indices such as the MSCI World currently allocate roughly 25% to AI and Big Data-related companies[1] – and since the launch of ChatGPT[2] in November 2022, more than half of the index's total return has been driven by AI and technology stocks alone[3], meaning a standard global equity allocation already represents a substantial, structural bet on the continued dominance of this theme.
That position has served investors well, and the structural tailwinds – compute demand, enterprise adoption, productivity gains – remain firmly in place. The case for staying invested is clear. Some of the largest AI-related companies now carry market capitalisations that rival entire developed market country indices. However, history suggests that the strong returns of today's leaders may not persist indefinitely.
Innovation leaders tend to become laggards
Average forward realised relative return of US Top 10 companies since 1980
Source: DWS International GmbH, Bloomberg, Goldman Sachs, as of June 2026. Past performance is not indicative of future returns.
Yet, a portfolio anchored heavily in one theme may leave diversification benefits unrealised and could find its risk-return profile less balanced than the opportunity set allows. A more balanced portfolio draws on multiple, distinct sources of return – each offering a potentially more attractive risk-adjusted contribution to the whole.
The steady rise of thematic investment strategies reflects exactly this instinct. Investors are increasingly looking beyond their core index exposure – not to reduce their AI allocation, but to build around it. Which raises the practical question: which themes genuinely broaden the return base, and which ones simply add a different label to the same underlying exposure?
How to think about themes beyond AI
Not all themes are created equal. At least not from a diversification standpoint. An investor adding a thematic ETF to an existing portfolio dominated by AI and large-cap technology may find that the new position moves largely in tandem with what they already hold. The label differs; the underlying exposure does not.
A useful starting point is to assess themes along two dimensions: how much of a theme's return is explained by the broader market, and how closely it tracks the currently prevailing theme. Themes that score high on both – moving with the market and clustering around the AI/tech complex – add relatively little in terms of genuine return driver diversification. We think it's worth taking a closer look at themes that diverge on at least one dimension.
Diversification from and within thematic allocations: Looking for less correlated thematic opportunities beyond the AI/tech cluster
Orange bar: S&P 500 (=market beta) explanatory power (r²)
Green bar: excess return correlation to Nasdaq 100 (as a broad thematic tech innovation proxy), using daily data since June 2020
Source: DWS International GmbH, as of 16/06/2026. Past performance, actual or simulated, is not a reliable indicator of future results. The mention of individual securities is for illustrative purposes only and should not be construed as investment advice or a recommendation to buy or sell any shares or securities.
How to read this chart?
What are we measuring? We evaluate themes across two dimensions to distinguish broad market exposure from genuine thematic return drivers.
S&P 500 Explanatory Power (R²) measures how much of a theme's return behaviour can be explained by movements in the broader equity market. Higher values indicate that performance is largely driven by market beta rather than theme-specific factors.
Excess Return Correlation to Nasdaq 100 measures the degree to which a theme's returns, after removing broad market effects, are driven by the same innovation and technology leadership trends that have dominated recent equity markets. Higher values suggest the theme is closely linked to the AI/technology complex.
Themes with lower readings on one or both measures are more likely to provide differentiated sources of return.
How to assess another theme?
This framework can be applied to any thematic index or ETF:
1. Calculate daily returns for the theme and a broad market (e.g. S&P 500) and broad thematic (e.g. Nasdaq 100) reference index.
2. Run an OLS regression of daily thematic returns against the broad market and record the resulting R²
3. Calculate the theme's daily excess returns over the broad market.
4. Measure the Excess Return Correlation to the broad thematic reference index.
Europe Defence, for instance, stands out in this framework – its returns seem hardly driven by broad market beta and show a negative correlation to the AI/tech theme. Electrification is another theme worth noting in this context: structurally linked to AI infrastructure as a key enabler, yet representing only around 2.7 percent of the MSCI World – and therefore a potentially useful building block to broaden portfolio return drivers beyond standard index exposure. We explored this theme in depth in our April Spotlight. Beyond these examples, we want to shed light on two themes that remain underrepresented in many portfolios, introducing genuinely distinct sources of return.
Two distinct opportunities worth examining
1. China technology
This market, by default, is entirely absent from the MSCI World. If no meaningful EM exposure is held, this theme presents an innovation ecosystem of considerable scale that standard portfolios may not yet capture. As a geographic counterweight to US Tech, it has historically followed a different performance cycle (see chart below) – offering diversification on multiple levels: different growth drivers, policy sensitivities, and earnings dynamics.[4] This comes as no surprise since the theme exhibits its own regulatory environment and an accelerating push for technological self-reliance. China's latest five-year plan mentions AI more than 50 times, targeting breakthroughs in semiconductors, quantum computing, and robotics.[5] A stark example of diverging innovation paths is the recent US government directive that temporarily barred non-US access to Anthropic's[6] Fable 5 model, effectively suspending foreign users' access to one of the world's most advanced AI systems overnight before the restriction was later lifted.[7]
Time for China tech to play catch-up?
2-year total return comparison of Magnificent 7 & China Tech 8 (equal-weighted) relative to S&P 500 index
Source: DWS International GmbH, Bloomberg, as of June 2026. Period: June 2024 to June 2026. Past performance, actual or simulated, is not a reliable indicator of future results.
2. Active ETFs: Stock selection as a potential source of return
Active ETFs can offer a structurally different approach to gaining diversification and add further sources of return. Through active portfolio management and deliberate stock selection, they can meaningfully reduce correlation to the broader market. This also allows for a more targeted management of concentration risk, with portfolio construction driven by conviction rather than market capitalisation.
Non-benchmarked investment strategies, for example, can deliberately diverge from index weights at the sector, country, and single-stock level, reducing the mechanical pull towards today's largest index holdings and creating room for return drivers that are structurally independent of the AI/tech cluster. More targeted high-conviction approaches, such as growth strategies focusing on smaller, second-tier innovator stocks, by design, avoid crowding into current index heavyweights and instead target the next generation of potential leaders.[8] Therefore, certain discretionary strategies have the potential to offer return drivers that genuinely diversify and broaden a portfolio's return base.
Check out our June Spotlight for a deeper look at Active ETFs.