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Magnify Gains in 2024 With "Magnificent Seven" ETFs
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The so-called "Magnificent Seven" have been instrumental in driving the market rally this year on artificial intelligence (AI) craze. The seven stocks — Apple (AAPL - Free Report) , Microsoft (MSFT - Free Report) , Alphabet (GOOG - Free Report) , (GOOGL - Free Report) , Amazon (AMZN - Free Report) , Nvidia (NVDA - Free Report) , Tesla (TSLA - Free Report) and Meta Platforms META — are responsible for 76% of the S&P 500's 2023 rise and represent a collective $11.5 trillion in market value.
With a combined weighting of 28% in the S&P 500, the "Magnificent Seven" are poised to see more gains in 2024. Goldman Sachs predicts these seven stocks to outshine the remaining 493 stocks in the S&P 500 in 2024 too (read: 5 Tech ETFs that Crushed the Magnificent Seven ETFs in 2023).
We have cited several reasons for the expected solid performances in 2024:
Unstoppable AI Boom: Nvidia emerged as a major beneficiary of the AI boom in 2023, returning a whopping 239% followed by Meta Platform, which saw its shares surging an impressive 191%. Amazon gained more than 80% in 2023, as the e-commerce giant advanced in the AI space. Shares of Alphabet and Microsoft climbed about 60% in 2023 amid enthusiasm for the company's AI-related advancements.
The craze for AI is expected to stay in 2024 with many experts believing that the AI journey of these market leaders has just begun, and more innovations in this field will unfold.
Cloud Computing's Bright Prospects: Cloud computing, a sector dominated by Amazon, Microsoft, and Alphabet, remains a promising area. The cloud infrastructure services market is projected to grow from $122 billion in 2023 to $446 billion by 2032. Despite economic concerns prompting a cost-reduction focus among some customers, the sector's revenue impact remains minimal. However, Amazon’s e-commerce business is facing increased competition, notably from Walmart, affecting its share value.
Solid Fundamentals: Goldman Sachs explains that these mega-cap tech stocks have superior fundamentals compared to the rest of the S&P 500. They boast faster growth rates, higher profit margins, cleaner balance sheets and reasonable valuations. Analyst projections indicate that these companies will experience a compound annual growth rate (CAGR) of 11% through 2025, significantly higher than 3% for the rest of the index. Additionally, the net margins of these seven companies are double than that of the rest of the index, a trend expected to continue.
Still Attractive Valuation: Despite high price-to-earnings valuations, when adjusted for growth, these mega-cap tech stocks align with market averages. Their earnings-weighted long-term expected earnings per share (EPS) growth is 8 percentage points faster than the median S&P 500 stock, per Goldman. On a price-to-earnings-growth ratio basis, their valuations mirror the 10-year average (see: all the Technology ETFs here).
Any Challenges Ahead?
Shares of Tesla, the renowned electric vehicle (EV) manufacturer, have nearly doubled this year but might face reduced market share in 2024 amid stiff competition. The company’s dominance in the U.S. market has slipped from 62% to just over 50%. With the average cost of EVs in China significantly lower than in Europe and the United States, Tesla faces stiff competition. Additionally, President Joe Biden’s proposed car pollution controls, requiring a substantial shift to electric vehicles by 2032, underscore the need for more affordable EVs.
One analyst, Bernstein, expects that the EV pioneer could “disappoint” investors in the New Year due to low demand “stemming from Tesla's narrow (and expensive) product family, which is reaching saturation.
ETFs to Tap
Given this, investors may want to play these stocks with the help of ETFs. Below, we have highlighted some ETFs having the largest exposure to "Magnificent Seven."
Roundhill Magnificent Seven ETF offers investors concentrated exposure to the “Magnificent Seven” stocks. It has amassed $31 million in its asset base and charges 29 bps in fees per year. It trades in an average daily volume of 6,000 shares (read: 5 ETF Stories of 2023 Likely to Stay Relevant in 2024 Too).
This ETN is linked to the performance of the NYSE FANG+ Index, which is equal-dollar weighted and designed to provide exposure to a group of highly traded growth stocks of next-generation technology and tech-enabled companies. The note accounts for a 10% share in each of these seven stocks. MicroSectors FANG+ ETN has accumulated $170.2 million in its asset base and charges 58 bps in annual fees. It trades in a moderate volume of 207,000 shares a day on average and has a Zacks ETF Rank #3 (Hold).
Vanguard Mega Cap Growth ETF tracks the CRSP US Mega Cap Growth Index. It holds 88 securities in its basket, with the Magnificent Seven collectively accounting for 57% of the total assets. Vanguard Mega Cap Growth ETF charges 7 bps in annual fees and trades in a good volume of around 346,000 shares a day on average. The fund has AUM of $16.4 billion and a Zacks ETF Rank #2 (Buy).
Invesco S&P 500 Top 50 ETF follows the S&P 500 Top 50 ETF Index, which measures the cap-weighted performance of 50 of the largest companies on the S&P 500 Index, reflecting the performance of the U.S. mega-cap stocks. It holds 54 stocks in its basket and Magnificent Seven accounts for a combined 50% share. Invesco S&P 500 Top 50 ETF has been able to manage assets worth $3.2 billion but trades in a good volume of about 727,000 shares a day on average. XLG charges 20 bps in annual fees and has a Zacks ETF Rank #3.
iShares S&P 100 ETF offers exposure to 101 largest U.S. companies. Magnificent Seven accounts for a combined 41.6% share. iShares S&P 100 ETF has amassed $12.5 million in its asset base and charges 20 bps in annual fees. It trades in average daily volume of 536,000 shares and has a Zacks ETF Rank #3.
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Magnify Gains in 2024 With "Magnificent Seven" ETFs
The so-called "Magnificent Seven" have been instrumental in driving the market rally this year on artificial intelligence (AI) craze. The seven stocks — Apple (AAPL - Free Report) , Microsoft (MSFT - Free Report) , Alphabet (GOOG - Free Report) , (GOOGL - Free Report) , Amazon (AMZN - Free Report) , Nvidia (NVDA - Free Report) , Tesla (TSLA - Free Report) and Meta Platforms META — are responsible for 76% of the S&P 500's 2023 rise and represent a collective $11.5 trillion in market value.
With a combined weighting of 28% in the S&P 500, the "Magnificent Seven" are poised to see more gains in 2024. Goldman Sachs predicts these seven stocks to outshine the remaining 493 stocks in the S&P 500 in 2024 too (read: 5 Tech ETFs that Crushed the Magnificent Seven ETFs in 2023).
We have cited several reasons for the expected solid performances in 2024:
Unstoppable AI Boom: Nvidia emerged as a major beneficiary of the AI boom in 2023, returning a whopping 239% followed by Meta Platform, which saw its shares surging an impressive 191%. Amazon gained more than 80% in 2023, as the e-commerce giant advanced in the AI space. Shares of Alphabet and Microsoft climbed about 60% in 2023 amid enthusiasm for the company's AI-related advancements.
The craze for AI is expected to stay in 2024 with many experts believing that the AI journey of these market leaders has just begun, and more innovations in this field will unfold.
Cloud Computing's Bright Prospects: Cloud computing, a sector dominated by Amazon, Microsoft, and Alphabet, remains a promising area. The cloud infrastructure services market is projected to grow from $122 billion in 2023 to $446 billion by 2032. Despite economic concerns prompting a cost-reduction focus among some customers, the sector's revenue impact remains minimal. However, Amazon’s e-commerce business is facing increased competition, notably from Walmart, affecting its share value.
Solid Fundamentals: Goldman Sachs explains that these mega-cap tech stocks have superior fundamentals compared to the rest of the S&P 500. They boast faster growth rates, higher profit margins, cleaner balance sheets and reasonable valuations. Analyst projections indicate that these companies will experience a compound annual growth rate (CAGR) of 11% through 2025, significantly higher than 3% for the rest of the index. Additionally, the net margins of these seven companies are double than that of the rest of the index, a trend expected to continue.
Still Attractive Valuation: Despite high price-to-earnings valuations, when adjusted for growth, these mega-cap tech stocks align with market averages. Their earnings-weighted long-term expected earnings per share (EPS) growth is 8 percentage points faster than the median S&P 500 stock, per Goldman. On a price-to-earnings-growth ratio basis, their valuations mirror the 10-year average (see: all the Technology ETFs here).
Any Challenges Ahead?
Shares of Tesla, the renowned electric vehicle (EV) manufacturer, have nearly doubled this year but might face reduced market share in 2024 amid stiff competition. The company’s dominance in the U.S. market has slipped from 62% to just over 50%. With the average cost of EVs in China significantly lower than in Europe and the United States, Tesla faces stiff competition. Additionally, President Joe Biden’s proposed car pollution controls, requiring a substantial shift to electric vehicles by 2032, underscore the need for more affordable EVs.
One analyst, Bernstein, expects that the EV pioneer could “disappoint” investors in the New Year due to low demand “stemming from Tesla's narrow (and expensive) product family, which is reaching saturation.
ETFs to Tap
Given this, investors may want to play these stocks with the help of ETFs. Below, we have highlighted some ETFs having the largest exposure to "Magnificent Seven."
The Roundhill Magnificent Seven ETF (MAGS - Free Report)
Roundhill Magnificent Seven ETF offers investors concentrated exposure to the “Magnificent Seven” stocks. It has amassed $31 million in its asset base and charges 29 bps in fees per year. It trades in an average daily volume of 6,000 shares (read: 5 ETF Stories of 2023 Likely to Stay Relevant in 2024 Too).
MicroSectors FANG+ ETN (FNGS - Free Report)
This ETN is linked to the performance of the NYSE FANG+ Index, which is equal-dollar weighted and designed to provide exposure to a group of highly traded growth stocks of next-generation technology and tech-enabled companies. The note accounts for a 10% share in each of these seven stocks. MicroSectors FANG+ ETN has accumulated $170.2 million in its asset base and charges 58 bps in annual fees. It trades in a moderate volume of 207,000 shares a day on average and has a Zacks ETF Rank #3 (Hold).
Vanguard Mega Cap Growth ETF (MGK - Free Report)
Vanguard Mega Cap Growth ETF tracks the CRSP US Mega Cap Growth Index. It holds 88 securities in its basket, with the Magnificent Seven collectively accounting for 57% of the total assets. Vanguard Mega Cap Growth ETF charges 7 bps in annual fees and trades in a good volume of around 346,000 shares a day on average. The fund has AUM of $16.4 billion and a Zacks ETF Rank #2 (Buy).
Invesco S&P 500 Top 50 ETF (XLG - Free Report)
Invesco S&P 500 Top 50 ETF follows the S&P 500 Top 50 ETF Index, which measures the cap-weighted performance of 50 of the largest companies on the S&P 500 Index, reflecting the performance of the U.S. mega-cap stocks. It holds 54 stocks in its basket and Magnificent Seven accounts for a combined 50% share. Invesco S&P 500 Top 50 ETF has been able to manage assets worth $3.2 billion but trades in a good volume of about 727,000 shares a day on average. XLG charges 20 bps in annual fees and has a Zacks ETF Rank #3.
iShares S&P 100 ETF (OEF - Free Report)
iShares S&P 100 ETF offers exposure to 101 largest U.S. companies. Magnificent Seven accounts for a combined 41.6% share. iShares S&P 100 ETF has amassed $12.5 million in its asset base and charges 20 bps in annual fees. It trades in average daily volume of 536,000 shares and has a Zacks ETF Rank #3.