With less than three months left in 2023, it’s fair to say that the “magnificent seven” cadre of stocks have captivated investors this year and with good reason.
That group, which includes (AAPL), (MSFT), (NVDA), (AMZN), and (TSLA), has combined to generate 70% of the S&P 500’s 2023 upside. A significant percentage to be sure and one that’s prompted many market participants to wonder if it’s possible to beat the magnificent seven and if it’s even worth trying.
Perhaps surprisingly to some investors, opportunities exist to outpace the magnificent seven and that group includes exchange traded funds such as the (MOAT ). Year-to-date, MOAT is beating the S&P 500 by more than 200 basis points, but the good news doesn’t end there.
MOAT vs. Magnificent Seven
Undoubtedly, the rise of the seven growth stock darlings is impressive, but it belies some issues with basic index fund/ETF construction. Notably, those seven stocks now combine for more than a quarter of the S&P 500’s roster, meaning many supposedly diverse passive strategies aren’t as diverse as investors expect. If anything, these funds are sporting notable concentration risk.
For its part, MOAT’s largest holding – magnificent seven member (GOOG) – accounts for just 2.83% of the ETF’s portfolio.
“While their spectacular rise underscores the transformative power and profitability of technology in today’s digital age, it also poses a potential risk,” noted Coulter Regal, VanEck associate product manager. “If any of these companies were to falter, the ripple effect on the broader market could be significant. Diversification is a cornerstone of risk management in investing, and the increasing reliance on a handful of stocks for market returns challenges this foundational principle.”
Another point that could work in favor of MOAT is that the ETF’s underlying index – the Morningstar Wide Moat Focus Index – recently reduced its exposure to growth stocks, including some magnificent seven names. That could keep investors clear of some stocks with excessive earnings multiples.
“Amid stretched valuations this quarter, the Moat Index removed Meta Platforms leaving only Alphabet, Amazon, and Microsoft in the Moat Index at around a 5% weighting. Meanwhile, the Magnificent Seven have more than 25% exposure in the S&P 500 Index,” added Regal.
Investors shouldn’t interpret that as MOAT being a value ETF in traditional sense of the term. Twenty-nine percent of the fund’s holdings are considered value stocks while nearly 26% are classified as growth equities. The remainder are blend/core equities.
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