Don't Buy the "Magnificent Seven" Stocks. Do This Instead.

The “Magnificent Seven” moniker was coined in 2023 to describe a group of seven of the world’s largest technology stocks. They delivered an average return of 112% last year, which crushed the 24% return of the benchmark S&P 500 index. The seven stocks are:

1. Nvidia
2. Apple
3. Microsoft
4. Amazon
5. Alphabet (Google)
6. Meta Platforms
7. Tesla

Holding the Magnificent Seven worked like a charm last year, but the group has splintered in the early stages of 2024. Tesla is down 34% already this year, with Apple sinking 7%.

The Magnificent Seven companies operate at the forefront of the technology sector, and each of them is developing artificial intelligence (AI) in a unique way. Therefore, abandoning the group probably isn’t a good idea over the long-term despite the rocky start to 2024 for Tesla and Apple. However, investors might benefit from a slight change in strategy.

Image source: Getty Images.

An exchange-traded fund might be a better choice

Exchange-traded funds (ETFs) can hold dozens, or even hundreds, of individual stocks. They are designed to give investors exposure to a specific segment of the market neatly packaged into one security, saving them from having to build a portfolio of individual stocks themselves.

ETFs offer a number of benefits, and stable returns can be one of them. Considering they hold so many different stocks, a 34% loss in Tesla, for example, typically won’t sink the entire portfolio.

The Global X Artificial Intelligence and Technology ETF (NASDAQ: AIQ) can give investors broad exposure to the tech sector, and especially AI. Here’s why it’s a great alternative to buying the Magnificent Seven stocks.

The AIQ ETF holds each of the “Magnificent Seven” stocks

The AIQ ETF was established in 2018, and it owns 85 different stocks and securities. Its top 10 holdings — which include four of the Magnificent Seven — account for 33.1% of the total value of its portfolio:

Data source: Global X ETFs. Portfolio weightings as of March 15, 2024, and are subject to change.

AIQ’s largest holding is Nvidia, which is great considering it was the best-performing stock in the entire S&P 500 index in 2023. The semiconductor giant is synonymous with AI thanks to its industry-leading data center chips.

And the four Magnificent Seven stocks within AIQ’s top 10 holdings are accompanied by some other high-quality names. Netflix is the world’s largest streaming platform, and Oracle has emerged as a leader in AI data center infrastructure. Salesforce is also one of the most powerful software companies in the world on the back of its customer relationship management platform. It’s also investing heavily in AI to make its technology even more useful for businesses.

The AIQ ETF does own the other three Magnificent Seven stocks — Alphabet, Apple, and Tesla — but they sit outside its top 10 positions. Other notable names outside the top 10 include Broadcom, which is tackling AI in a number of different ways, and Uber Technologies, which is experimenting with autonomous vehicles — a move that could transform the company’s economics in the coming years.

The AIQ ETF is outperforming the S&P 500, and that could continue

The AIQ ETF has returned a whopping 48.5% over the last 12 months, beating both the S&P 500 (29.1%) and the Nasdaq-100 (41.5%). The outperformance is attributable to the high weighting toward its top 10 positions, and especially Nvidia at No. 1.

But the past year was no fluke. The ETF generated a compound annual gain of 17.2% over the past five years, which is better than the 14.3% average annual return of the S&P 500. Therefore, AIQ investors have been insulated from the recent underperformance of the Magnificent Seven’s Tesla and Apple. Such is the benefit of a diversified portfolio.

Wall Street’s forecasts for the financial impact of AI on the broader economy stretch into the trillions of dollars. If they prove accurate, the AIQ ETF will probably continue to outperform the broader market thanks to its exposure to so many different AI stocks.

On the other hand, the ETF could underperform the S&P 500 if AI fails to live up to the hype, and that’s an important risk to consider when investing in such a concentrated portfolio weighted toward one segment of the stock market.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. 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. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Netflix, Nvidia, Oracle, Qualcomm, Salesforce, Tencent, Tesla, and Uber Technologies. The Motley Fool recommends Broadcom and International Business Machines and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

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