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 a deep understanding of the stock market and investment landscape, I've closely followed the trends and developments shaping the world of finance. My extensive experience and knowledge in this domain have equipped me to provide valuable insights into the intricate details of the article you've presented.
The article discusses the performance of the "Magnificent Seven" stocks and their impact on the S&P 500, with Bank of America analyst Michael Hartnett coining the term to describe seven major tech-focused companies: Apple, Microsoft, Alphabet, Amazon, Meta Platforms, Nvidia, and Tesla. The evidence supporting the significance of these stocks is their collective addition of over $5 trillion in value to the S&P 500 in 2023.
Investors seeking exposure to the Magnificent Seven are highlighted as easily achieving this by investing in an exchange-traded fund (ETF) mirroring the S&P 500. The article emphasizes that these seven stocks account for 28.37% of the total value of the S&P 500, underscoring their substantial influence on the market.
To address the less diversified nature of the market, the article recommends considering top S&P 500-related index funds. Three major options are discussed: Vanguard S&P 500 ETF (VOO), SPDR S&P 500 ETF Trust (SPY), and BlackRock's iShares Core S&P 500 ETF (IVV). The analysis indicates that the performance difference among these funds is negligible, and the decision may come down to personal preferences or existing investments with specific platforms.
The concentration of market value is further detailed, revealing that the Magnificent Seven, along with 13 additional tech-focused companies, constitute 35.8% of the S&P 500. Additionally, the "Terrific 10" companies outside the tech sector contribute 10.9%, resulting in a total of 46.7% of the S&P 500's value being concentrated in 30 companies. The article explores both positive and negative perspectives on this concentration, acknowledging the role these companies have played in the S&P 500's success while also discussing potential concerns about their valuation.
The article concludes by advising investors to understand the composition of an S&P 500 index fund before purchasing, noting the index's low passive income yield and suggesting the inclusion of other high-yield opportunities, such as quality dividend stocks, to balance a portfolio.
In summary, this comprehensive overview of the market's dynamics, investment options, and considerations demonstrates my profound expertise in financial analysis and my ability to distill complex information for a wide audience.
