Published Date: October 23, 2024 | Author: Jake Coulson
In recent years, the so called “Magnificent 7” (Mag 7) have had an impressive run. The group – composed of Nvidia, Apple, Microsoft, Amazon, Google, Meta, and Tesla – collectively returned 271.13% over the 5 year period through to 2023, compared to the broader S&P 500 Index which returned 90.27%.
This strong performance has culminated in the Mag 7 taking a far greater share of the market-cap weighted S&P 500. As the chart below demonstrates, their total weight in the S&P 500 has more than doubled from 2014 to 2023. And so far this year, Mag 7 stocks have accounted for around a third of the index.
Source: Mellon; Bloomberg. Data as of 29.12.2023. For illustrative purposes only.
An investor in the S&P 500 may not see the issue here. After all, why worry about the dominance of a few names when their performance is so strong? In the first half of 2024, the Mag 7 accounted for almost 60% of the index’s returns. Perhaps, then, there is no need to focus on the remaining 493 stocks?
But what we are seeing here is intense overconcentration. Just as the Mag 7’s disproportionate influence over the S&P 500 can drive returns, so too can it drive losses.
In Q3, the Mag 7 lagged the S&P 500 for the first time since Q4 2022. Of course, 2022 saw a decline for major indices – but the Mag 7’s drop was far larger, as the table below shows.
Source: Mellon; Bloomberg. Data from 31.12.2021 – 30.12.2022. Past performance is not indicative of future performance. For illustrative purposes only.
The S&P 500 was less concentrated back then – but had Mag 7 stocks formed a third of the weighting as they do now, the index’s returns would have suffered more.
In the latter half of 2024, we have seen Mag 7 stocks encounter rockier performance. Since the 8th of July, through to the 11th of October, Tesla has returned -13.89%, Google -13.53%, Microsoft -10.55%, and Amazon -5.25%. As Forbes puts it, the Mag 7 have become “Drag 7”. Whilst Q4 saw a bounce-back in these stocks, it highlights the potential risks to overexposure.
The question, therefore, is whether investors want to risk being heavily concentrated in the Mag 7 over the coming months and years. Many who invest in the S&P 500 do so for diversification, and yet 493 names in that index are acutely overshadowed by the other 7.
Instead, for investors seeking true diversification, they may want to consider an equal weighted approach. In this scenario, constituents have an equal impact on the index’s returns, regardless of market-cap. This means if one stock – or a group of stocks such as the Mag 7 – falter, it will not necessarily have a disproportionate impact on the entire index’s returns.
HAN-GINS Tech Megatrend Equal Weight UCITS ETF (ITEK) provides exposure to the disruptive technology companies in “Industry 4.0” that are changing the world through global megatrends. The ETF uses a double diversification approach, allocating equal-weight to each subtheme and then equal weighting constituents within, with the aim of avoiding concentration in larger stocks such as the Mag 7.
ITEK includes eight subthemes:
The ETF’s constituents are not limited to one region or country, giving global coverage and access to smaller, global companies to better contribute to ITEK’s performance.
KEY RISKS
Thematic ETFs are exposed to a limited number of sectors and thus the investment will be concentrated and may experience high volatility. Investors’ capital is fully at risk and may not get back the amount originally invested. Exchange rates can have a positive or negative effect on returns.
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