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 a seasoned financial analyst with extensive experience in market analysis and investment strategies, I'm well-versed in the intricacies of stock market performance, index funds, and portfolio diversification. My expertise spans various investment vehicles, including ETFs, individual stocks, and sector-specific strategies.
Let's dissect the article you provided, focusing on key concepts and information:
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Magnificent Seven Stocks:
- These are seven massive tech-focused companies identified by Bank of America analyst Michael Hartnett: Apple, Microsoft, Alphabet (Google), Amazon, Meta Platforms (formerly Facebook), Nvidia, and Tesla. These companies significantly contributed to the S&P 500's growth in 2023, collectively adding over $5 trillion in value.
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S&P 500 Index Funds:
- S&P 500 index funds provide investors with exposure to a broad range of large-cap U.S. stocks. The article mentions three popular options: Vanguard S&P 500 ETF (VOO), SPDR S&P 500 ETF Trust (SPY), and BlackRock's iShares Core S&P 500 ETF (IVV). These funds aim to replicate the performance of the S&P 500 index and offer low-cost diversification.
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Market Concentration:
- The article highlights the increasing concentration of the market, particularly in the tech sector. The Magnificent Seven stocks alone represent a significant portion of the S&P 500's total value, accounting for 28.37%. Adding 13 more tech-focused companies further increases this concentration to 35.8%. Additionally, it mentions the "Terrific 10" companies outside the tech sector, contributing to the overall market concentration.
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Diversification:
- While concentration in certain stocks or sectors can offer opportunities for growth, it also poses risks. Diversification, achieved through investing in a variety of assets, sectors, and regions, helps mitigate these risks. The article emphasizes the importance of understanding the composition of S&P 500 index funds and suggests combining them with other investments for diversification purposes.
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Passive Income:
- The S&P 500 index is not typically known for high dividend yields, with an average yield of just 1.4%. This is due to many large components of the index, including some of the Magnificent Seven stocks, not paying dividends. To enhance passive income generation, the article recommends incorporating quality dividend stocks into the portfolio alongside S&P 500 index funds.
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Disclosure:
- The article includes a disclosure statement indicating potential conflicts of interest and affiliations of individuals and entities mentioned. It discloses partnerships and positions held by The Motley Fool, including recommendations for various stocks and ETFs, as well as affiliations of board members with certain companies.
In summary, the article discusses the performance of key tech stocks, the role of S&P 500 index funds in investment portfolios, market concentration risks, diversification strategies, passive income considerations, and disclosure of affiliations and potential conflicts of interest. It provides insights for investors looking to navigate the evolving landscape of the stock market and make informed investment decisions.
