There Is a Quiet But Massive Migration Away From Tech Stocks in 2026

In the last three months of 2025, the tech sector experienced what some called a “correction”. However, the selloff was not from investors going into cash out of fear; hedge funds and other large institutional investors were, in fact, rotating out of tech stocks and into, of all things – defensive stocks. As this trend has continued through the new year into January, the following defensive stock sector ETFs may be worth keeping an eye on:

• Invesco Aerospace & Defense ETF (NYSE: PPA)
• Consumers Staples Select Sector SPDR Fund (NYSE: XLP)
• Vanguard Health Care Index Fund ETF Shares (NYSE: VHT)

Shuffling Inside the S&P 500

While the Magnificent 7 AI tech stocks have been leading the S&P 500 to stratospheric heights, a growing consensus of analysts and market watchers have been vocally public with their criticisms about stocks in the tech and AI sector being overvalued, overbought, and due for a correction. Among these parties are:

• Michael “The Big Short” Burry 
• Rishi Jaluria of RBC Capital
• Jay Goldberg at Seaport Research
• Alexander Haissi of Redburn Atlantic
• Warren Buffett of Berkshire Hathaway

In Q4 2025, hedge funds and other institutions apparently started taking these contrarian sentiments seriously, with not only billions of outflows from the tech sector per day, but trillion dollar net cap Magnificent 7 leaders like Nvidia taking a body blow drop as steep as -7.0% in only a few weeks. 

However, any profit taking or shorting of tech stocks didn’t impact the S&P 500 proportionately, since the majority of the funds rotated into defensive stocks – companies with consistent earnings and steady growth that were not cyclical or trend oriented. As most large defensive stocks are also S&P 500 members, the tech fall offs affected the S&P 500 considerably less than indexes geared towards tech stocks or their subsectors. The trend does not appear to want to subside as we have entered 2026, so ETFs that track certain defensive stock sectors will likely benefit as this trajectory continues. 

Invesco Aerospace & Defense ETF

The Aerospace & Defense sector is considered a defensive stock area, although its fortunes are also predicated on politics and geopolitical events. The Trump Administration recently announced it was proposing an increased Department of War budget to $1.5 trillion on the heels of Operation Absolute Resolve, which attacked Venezuelan military targets to capture, apprehend, and extradite narco-terrorist dictator Nicholas Maduro back to the US to stand trial. The administration destroyed Iran’s nuclear weapon capabilities earlier in 2025 with Operation Midnight Hammer, yet Iran has not ended its terrorism campaigns via its Hezbollah proxy. Many believe another deployment may soon follow.

With military recruitment at record highs and a military hardware upgrade project already underway under Secretary of War Hegseth, the Aerospace & Defense sector is poised for further growth, making it a ripe target for reallocated tech stock funds. 

PPA was launched on 10-26-2005. Designed to track the S&P Composite 1500 Aerospace & Defense Index, it has a 5-star Morningstar rating. 

The top 10 holding of PPA are:

• Boeing: 8.98%
• General Electric: 8.78%
• RTX Corp.: 8.53%
• Lockheed Martin: 7.51%
• Northrop Grumman: 5.38%
• General Dynamics: 5.17%
• L3Harris Technologies: 4.06%
• Honeywell International: 3.94%
• Howmet Aerospace: 3.92%
• Parker-Hannifin: 3.26%

Consumers Staples Select Sector SPDR Fund

The affordability concerns voiced by many in big cities have become a national mantra for the Democratic Party of late, desperate for a platform upon which to run on  for the midterm elections. As such, institutional stock rotation out of tech and consumer discretionary stocks, which are those not considered “essential”, like hotels and restaurants, and into consumer staples, which includes food, personal care products, and household products. Although the past years have seen lower than average returns due to the large allocation in tech, the rotation should favor at least a closer return to the historical norm.

With an inception date of December 16, 1998, XLP is into its 28th year of tracking the S&P 500’s Consumer Staples Select Sector. XLP has a 4-star Morningstar rating. 

XLP’s top 10 holdings are:

• WalMart: 11.71%
• Costco: 9.27%
• Procter & Gamble: 7.64%
• Coca-Cola: 6.20%
• Philip Morris: 5.72%
• Pepsico: 4.44%
• Mondelez Int’l: 4.35%
• Colgate-Palmolive: 4.33%
• Altria: 4.24%
• Monster Beverage: 3.79%

Vanguard Health Care Index Fund ETF Shares

Healthcare is probably the sector that saw the largest inflows of tech stock rotation funds. The combination of steady growth, consistent cashflow, and biotech breakthrough potential made healthcare a particularly attractive alternative to AI. With healthcare expected to become a huge growth 2026 area, due to rapid adoption of agentic AI, a surge in GLP-1 obesity treatments, and a large shift toward lower-acuity care settings like ambulatory surgery centers (ASCs).

VHT has a 4-star Morningstar rating. It launched on January 26, 2004. 

The top 10 holdings of VHT are:

• Eli Lilly: 12.39%
• Abbvie: 4.85%
• Johnson & Johnson: 4.42%
• United Health Group: 4.02%
• Merck: 3.75%
• Abbott Labs: 3.21%
• NYSE: TMO : 3.19%
• Intuitive Surgical: 2.94%
• Amgen: 2.66%
• Gilead Sciences: 2.33%