{"id":60072,"date":"2023-09-12T12:40:30","date_gmt":"2023-09-12T16:40:30","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/heres-an-easy-way-to-make-a-more-concentrated-play-on-the-magnificent-seven-stocks\/"},"modified":"2023-09-12T12:40:34","modified_gmt":"2023-09-12T16:40:34","slug":"heres-an-easy-way-to-make-a-more-concentrated-play-on-the-magnificent-seven-stocks","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=60072","title":{"rendered":"Here\u2019s an easy way to make a more concentrated play on the \u2018Magnificent Seven\u2019 stocks"},"content":{"rendered":"
Investors in index funds have been well rewarded by a high concentration in the largest technology companies over the past decade. But there are also continuing warnings about the risk of such heavy concentrations, even in index funds that track the S&P 500. Solutions are offered to limit this risk, but if you expect Big Tech to continue to drive the broad market returns over the coming years, why not make an even more focused bet?<\/p>\n
Comparisons of three index-fund approaches highlight how successful concentration in the \u201cMagnificent Seven\u201d has been. <\/p>\n
\n
The Magnificent Seven are Apple Inc. \n AAPL, \n -1.46%<\/bg-quote>,<\/span> \n Microsoft Corp. \n MSFT, \n -1.36%<\/bg-quote>,<\/span> \n Nvidia Corp. \n NVDA, \n +0.26%<\/bg-quote>,<\/span> \n Amazon.com Inc. \n AMZN, \n -0.95%<\/bg-quote>,<\/span> \n Alphabet Inc. \n GOOGL, \n -0.73%<\/bg-quote><\/p>\n
GOOG, \n -0.77%<\/bg-quote>,<\/span> \n Tesla Inc. \n TSLA, \n -1.35%<\/bg-quote> \n and Meta Platforms Inc. \n META, \n -1.68%<\/bg-quote>.<\/span> \n We have listed them in the order of their concentration within the Invesco S&P 500 ETF Trust \n SPY,<\/span> \n which tracks the S&P 500 \n SPX.<\/span> \n The U.S. benchmark index is weighted by market capitalization, as is the Nasdaq Composite Index \n COMP \n and the Russell indexes. <\/p>\n
SPY is 27.6% concentrated in the Magnificent Seven. One way to play the same group of 500 stocks but eliminate concentration risk is to take an equal-weighted approach to the index, which has worked well for certain long periods. But here, we\u2019re focusing on how well the concentrated strategy has worked. <\/p>\n
Let\u2019s take a look at the group\u2019s concentration in three popular index approaches, then look at long-term performance and consider what happened in 2022 as rising interest rates helped crush the tech sector.<\/p>\n
Here are the portfolio weightings for the Magnificent Seven in SPY, along with those of the Invesco QQQ Trust \n QQQ,<\/span> \n which tracks the Nasdaq-100 Index \n NDX \n and the Invesco S&P 500 Top 50 ETF \n XLG \n :<\/p>\n
\n
\n
\n Company<\/strong><\/p>\n<\/td>\n
\n Ticker<\/strong><\/p>\n<\/td>\n
\n % of SPY<\/strong><\/p>\n<\/td>\n
\n % of QQQ<\/strong><\/p>\n<\/td>\n
\n % of XLG<\/strong><\/p>\n<\/td>\n<\/tr>\n
\n
\n Apple Inc.<\/p>\n<\/td>\n
\n AAPL, \n -1.46%<\/bg-quote>\n <\/td>\n
\n 7.05%<\/p>\n<\/td>\n
\n 10.85%<\/p>\n<\/td>\n
\n 12.46%<\/p>\n<\/td>\n<\/tr>\n
\n
\n Microsoft Cor.<\/p>\n<\/td>\n
\n MSFT, \n -1.36%<\/bg-quote>\n <\/td>\n
\n 6.65%<\/p>\n<\/td>\n
\n 9.53%<\/p>\n<\/td>\n
\n 11.76%<\/p>\n<\/td>\n<\/tr>\n
\n
\n Amazon.com Inc.<\/p>\n<\/td>\n
\n AMZN, \n -0.95%<\/bg-quote>\n <\/td>\n
\n 3.30%<\/p>\n<\/td>\n
\n 5.50%<\/p>\n<\/td>\n
\n 5.84%<\/p>\n<\/td>\n<\/tr>\n
\n
\n Nvidia Corp.<\/p>\n<\/td>\n
\n NVDA, \n +0.26%<\/bg-quote>\n <\/td>\n
\n 3.02%<\/p>\n<\/td>\n
\n 4.44%<\/p>\n<\/td>\n
\n 5.33%<\/p>\n<\/td>\n<\/tr>\n
\n
\n Alphabet Inc. Class A<\/p>\n<\/td>\n
\n GOOGL, \n -0.73%<\/bg-quote>\n <\/td>\n
\n 2.17%<\/p>\n<\/td>\n
\n 3.12%<\/p>\n<\/td>\n
\n 3.83%<\/p>\n<\/td>\n<\/tr>\n
\n
\n Alphabet Inc. Class C<\/p>\n<\/td>\n
\n GOOG, \n -0.77%<\/bg-quote>\n <\/td>\n
\n 1.88%<\/p>\n<\/td>\n
\n 3.11%<\/p>\n<\/td>\n
\n 3.32%<\/p>\n<\/td>\n<\/tr>\n
\n
\n Tesla Inc.<\/p>\n<\/td>\n
\n TSLA, \n -1.35%<\/bg-quote>\n <\/td>\n
\n 1.79%<\/p>\n<\/td>\n
\n 3.10%<\/p>\n<\/td>\n
\n 3.17%<\/p>\n<\/td>\n<\/tr>\n
\n
\n Meta Platforms Inc. Class A<\/p>\n<\/td>\n
\n META, \n -1.68%<\/bg-quote>\n <\/td>\n
\n 1.77%<\/p>\n<\/td>\n
\n 3.60%<\/p>\n<\/td>\n
\n 3.12%<\/p>\n<\/td>\n<\/tr>\n
\n
\n Totals<\/strong><\/p>\n<\/td>\n
\n \u00a0<\/p>\n<\/td>\n
\n 27.63%<\/strong><\/p>\n<\/td>\n
\n 43.25%<\/strong><\/p>\n<\/td>\n
\n 48.83%<\/strong><\/p>\n<\/td>\n<\/tr>\n
\n
\n Sources: Invesco Ltd., State Street Corp.<\/p>\n<\/td>\n<\/tr>\n<\/table>\n
The same group of seven companies (eight stocks with two common share classes for Alphabet) is at the top of each exchange-traded fund\u2019s portfolio, although the top seven for QQQ aren\u2019t in the same order as those for SPY and XLG. QQQ\u2019s weighting was changed recently as the underlying Nasdaq-100 underwent a \u201cspecial rebalancing\u201d last month.<\/p>\n
Here\u2019s a five-year chart comparing the performance of the three approaches. All returns in this article include reinvested dividends.<\/p>\n
<\/p>\n
<\/p>\n
<\/p>\n
<\/div>\n<\/figure><\/div>\n
QQQ has been the clear winner for five years, but it is also worth noting how well XLG has performed when compared with SPY. This \u201ctop 50\u201d approach to the S&P 500 incorporates many stocks that aren\u2019t listed on the Nasdaq and therefore cannot be included in QQQ, which itself is made up of the largest 100 nonfinancial companies in the full Nasdaq Composite Index \n COMP, \n +2.13%<\/bg-quote>.<\/span>\n <\/p>\n
Examples of stocks held by XLG that aren\u2019t held by QQQ include such non-tech stalwarts as Berkshire Hathaway Inc. \n BRK.B, \n +1.09%<\/bg-quote>,<\/span> \n Johnson & Johnson \n JNJ, \n +0.41%<\/bg-quote>,<\/span> \n Procter & Gamble Co. \n PG, \n -1.63%<\/bg-quote>,<\/span> \n Home Depot Inc. \n HD, \n -0.29%<\/bg-quote> \n and Nike Inc. \n NKE, \n -0.15%<\/bg-quote>.<\/span>\n <\/p>\n
Now let\u2019s go deeper into long-term performance. First, here are the total returns for various time periods:<\/p>\n
Click on the tickers for more about each ETF, company or index.<\/p>\n
Click\u00a0here\u00a0for Tomi Kilgore\u2019s detailed guide to the wealth of information available for free on the MarketWatch quote page.<\/p>\n
There is no 20-year return for XLG because this ETF was established in 2005.<\/p>\n
For five years and longer, QQQ has been the runaway leader, but for 5, 10 and 15 years, XLG has also beaten SPY handily, with broader industry exposure.<\/p>\n
Something else to consider is that during 2022, when SPY was down 18.2%, XLG fell 24.3% and QQQ dropped 32.6%.<\/p>\n
For disciplined long-term investors, the tech pain of 2022 may not seem to have been a small price to pay for outperformance. And it may have been easier to take the pounding when holding SPY or even XLG that year.<\/p>\n
Here\u2019s a look at the average annual returns for the three ETFs:<\/p>\n
So the question remains \u2014 do you believe that the largest technology companies will continue to lead the stock market for the next decade at least? If so, a more concentrated index approach may be for you, provided you can withstand the urge to sell into a declining market, such as the one we experienced last year.<\/p>\n
Here is something else to keep in mind. In a note to clients on Monday, Doug Peta, the chief U.S. investment strategist at BCA, made a fascinating point: \u201cThe only novel development is that all the heaviest hitters now hail from Tech and Tech-adjacent sectors and are therefore more prone to move together than they were at the end of 2004, when the seven largest stocks came from six different sectors. \u201c<\/p>\n
Nothing lasts forever. Peta continued by suggesting that investors who are tired of big tech taking all the glory \u201cneed only wait.\u201d<\/p>\n
\u201c[I]f history is any guide, their time at the top of the capitalization scale will be short,\u201d he wrote.<\/p>\n
Don\u2019t<\/strong> miss: These four Dow stocks take top prizes for dividend growth<\/p>\n<\/p><\/div>\n