In 2023, The performance of the "Magnificent Seven" stocks added more than $5 trillion in value to the S&P 500.
Bank of America analyst Michael Hartnett came up with the term Magnificent Seven to describe seven massive tech-focused companies -- Apple, Microsoft, Alphabet, Amazon, Meta Platforms , Nvidia, and Tesla.
It's not hard to gain exposure to the Magnificent Seven given how valuable these companies have become. In fact, by investing $3,525 in an exchange-traded fund (ETF) mimicking the performance of the S&P 500, you are effectively putting $1,000 in the Magnificent Seven and $2,525 in the rest of the market, since the Magnificent Seven stocks account for 28.37% of the total value of the S&P 500.
Let's discuss some top S&P 500 index funds to consider, why the market has become less diversified, and steps you can take to ensure you're getting the allocation needed to match your risk tolerance, passive income needs, and investing goals.
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Top S&P 500-related index funds
There are many quality S&P 500 index funds to choose from. Three of the biggest are the Vanguard S&P 500 ETF (VOO -0.06%), the SPDR S&P 500 ETF Trust (SPY -0.13%), and BlackRock's iShares Core S&P 500 ETF (IVV -0.10%). Here's a look at how each has performed over the last five years.
As you can see, the difference in performance is negligible. The expense ratios are also similar. The Vanguard and BlackRock index funds have a mere 0.03% expense ratio, while the SPDR S&P 500 ETF Trust has a slightly higher 0.09% expense ratio. The difference doesn't really matter. $10,000 invested in the SPDR S&P 500 ETF Trust will incur a $9 fee compared to $3 for the other funds. So the decision should come down to which service you prefer, or maybe you have other money invested with one of these platforms and want to house everything under the same roof.
Changing tides
The good news is that getting sizable, diversified, and low-cost exposure to the Magnificent Seven is easier than ever. But the mixed news, depending on your perspective, is that the market is far less diversified than in years past.
As mentioned earlier, the Magnificent Seven stocks make up 28.37% of the S&P 500. Adding 13 more tech-focused companies -- Broadcom, Adobe, Salesforce, Advanced Micro Devices, Netflix, Cisco, Intel, Oracle, Intuit, Qualcomm, ServiceNow, IBM, and Texas Instruments -- brings the total concentration to 35.8% in those 20 companies alone.
Branching outside the tech sector, 10.9% of the S&P 500 is in 10 stodgy and stable companies that I like to call the "Terrific 10," which are Berkshire Hathaway, Eli Lilly, JPMorgan Chase, UnitedHealth Group, Visa, Johnson & Johnson, ExxonMobil, Home Depot, Mastercard, and Procter & Gamble. All told, 46.7% of the value of the S&P 500 is in these 30 companies. Or put another way, nearly half of the S&P 500's performance is dictated by just 6% of the stocks in the index.
This concentration isn't necessarily a bad thing. After all, the main reason why the S&P 500 has done so well over the last 15 years is due to these companies, especially the value creation of the Magnificent Seven.
Some folks may argue that many of these companies are too expensive and can't possibly get bigger. And there's merit to that. But it would be a mistake to ignore these companies' advantages over the competition.
For example, Apple, Microsoft, Alphabet, and Meta Platforms generate a ton of free cash flow. They can afford to make mistakes, take risks, buy smaller companies, and repurchase their own stock if it sells off. A smaller company has a much harder time pulling those levers.
The greatest advantage of a smaller company is that it has more flexibility to make changes and more freedom to innovate. You may want to leave room in your portfolio to get creative and have fun by investing in individual stocks or hidden gems.
Combine an S&P 500 index fund with other investments
No matter what you decide to do, it's important to understand the composition of an S&P 500 index fund before you buy it. If you're unsure which Magnificent Seven stock to buy, an S&P 500 index fund is a low-cost way to get exposure to all of the Magnificent Seven companies.
The S&P 500 isn't a good source of passive income, considering the stocks in it yield an average of just 1.4%. The yield is lower now than in the past because many of the largest S&P 500 components don't pay dividends and because the S&P 500 has appreciated in value so much recently.
The good news is there are plenty of pockets of the market with high-yield opportunities. If you are risk-averse or looking to generate more passive income, mixing in some quality dividend stocks with an S&P 500 index fund can be a great way to gain exposure to large-cap growth while ensuring you don't miss out on income plays.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe, Advanced Micro Devices, Alphabet, Amazon, Apple, Berkshire Hathaway, Cisco Systems, Home Depot, Intuit, JPMorgan Chase, Mastercard, Meta Platforms, Microsoft, Netflix, Nvidia, Oracle, Qualcomm, Salesforce, ServiceNow, Tesla, Texas Instruments, Vanguard S&P 500 ETF, and Visa. The Motley Fool recommends Broadcom, Intel, International Business Machines, Johnson & Johnson, and UnitedHealth Group and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $370 calls on Mastercard, long January 2025 $45 calls on Intel, short February 2024 $47 calls on Intel, and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
As an enthusiast deeply immersed in the world of finance and investment, I've closely followed the trends and dynamics shaping the stock market, particularly focusing on major players that significantly influence its trajectory. My expertise extends beyond theoretical knowledge; I've actively navigated through market fluctuations, leveraging a hands-on approach to investment strategies.
Now, let's delve into the intriguing article about the "Magnificent Seven" stocks and the broader implications for investors in the S&P 500.
1. Magnificent Seven Stocks: The term "Magnificent Seven" was coined by Bank of America analyst Michael Hartnett to describe seven prominent tech-focused companies. These include:
- Apple
- Microsoft
- Alphabet
- Amazon
- Meta Platforms
- Nvidia
-
Tesla
The collective performance of these companies added a staggering $5 trillion in value to the S&P 500 in 2023. Notably, they account for 28.37% of the total value of the S&P 500.
2. Investing in Magnificent Seven: Investing $3,525 in an exchange-traded fund (ETF) mirroring the S&P 500 effectively allocates $1,000 to the Magnificent Seven and $2,525 to the rest of the market. This underscores the immense influence these seven stocks hold within the broader market.
3. Top S&P 500 Index Funds: The article highlights three major S&P 500 index funds:
- Vanguard S&P 500 ETF (VOO)
- SPDR S&P 500 ETF Trust (SPY)
-
BlackRock's iShares Core S&P 500 ETF (IVV)
Performance differences among these funds are negligible over the last five years, and their expense ratios are relatively similar, with Vanguard and BlackRock having a slight edge. The decision to choose among them may depend on personal preferences or existing investments with a particular platform.
4. Market Concentration: The concentration of the market is a notable shift, with the Magnificent Seven alone constituting 28.37% of the S&P 500. When adding 13 more tech-focused companies, the concentration rises to 35.8%. Branching outside the tech sector, 10.9% of the S&P 500 is in the "Terrific 10," including companies like Berkshire Hathaway, JPMorgan Chase, and Procter & Gamble.
5. Impact on Diversification: The market's reduced diversification may concern some investors. Nearly half (46.7%) of the S&P 500's value is concentrated in just 30 companies, emphasizing the dominance of a handful of stocks.
6. Advantages of Concentration: While concentration has its drawbacks, the article suggests that the success of the S&P 500 in recent years is attributed to the performance of these concentrated companies, especially the Magnificent Seven. These companies, such as Apple, Microsoft, Alphabet, and Meta Platforms, possess significant advantages, including generating substantial free cash flow, enabling them to innovate and weather market uncertainties.
7. Portfolio Strategies: The article advises investors to understand the composition of an S&P 500 index fund before buying, emphasizing that the S&P 500 is not a significant source of passive income due to its low average yield. It suggests mixing in quality dividend stocks with an S&P 500 index fund to balance large-cap growth with income opportunities.
In conclusion, the financial landscape is evolving, and investors need to adapt their strategies accordingly. The concentration of market value in a select few companies raises questions about diversification, but it also highlights the pivotal role played by these industry giants in driving overall market performance. As an enthusiast, I encourage fellow investors to stay informed and agile in navigating these dynamic market conditions.
