Last year was exciting for the stock market. The Dow Jones Industrial Average and the Nasdaq Composite both rebounded from sharp declines that occurred in 2022, with tech stocks in particular fueling much of the gains.
One of the biggest themes for the capital markets over the last year is artificial intelligence (AI). In particular, a small cohort of mega-cap tech enterprises known as the "Magnificent Seven" seems to garner much of the attention and scrutiny from Wall Street.
While these companies each contain unique exposure to the overall AI landscape, choosing which ones to invest in could prove daunting. Luckily, an exchange-traded fund (ETF) called the Roundhill Magnificent Seven ETF (MAGS 0.46%) provides investors with a passive strategy to benefit from the biggest names surrounding AI.
Let's dig into this ETF to assess why it could be a lucrative opportunity in the long run.
What are the "Magnificent Seven"?
The Magnificent Seven is a catchy moniker used to capture some of the most valuable companies in the world by market cap. The exclusive club consists of Apple, Microsoft, Alphabet, Amazon, Meta, Nvidia, and Tesla.
The chart above illustrates the return of each Magnificent Seven member over the last year. It's easy to see that these stocks have largely outperformed the broader markets and have played a major role in sending the S&P 500 to new all-time highs.
Tesla is the only one of these stocks to generate a negative return over the last year. This is mostly due to its poor performance so far in 2024, with heavy selling activity following its fourth-quarter earnings report.
What can investors expect from the Roundhill Magnificent Seven ETF?
As the name implies, the Roundhill Magnificent Seven ETF provides investors with passive exposure to each member of the group -- nothing more, nothing less.
Since its inception in April 2023, the Roundhill ETF has a total return of nearly 46%. This handily beats the average annual return of the S&P 500. This is not entirely surprising given the overall positive performance of the seven stocks, as depicted in the chart above.
Should you invest in the ETF?
What is important to understand is that the capital markets will experience more-pronounced years of growth or declines from time to time. Given that the Roundhill ETF is still a nascent investment vehicle, taking a position in the fund based on only one year's performance could prove to be a hasty move.
Instead, investors should zoom out and think about the long term. For example, understanding that generative AI will be used in many of the products and services developed by the Magnificent Seven is worth consideration. Moreover, given that uses for AI are still unfolding, investors should think about which companies are best positioned to benefit from the tailwinds the technology presents.
If you believe that the Magnificent Seven are the best ways to gain exposure to AI, the Roundhill Magnificent Seven ETF could be a prudent way to invest without building positions in each individual member. Moreover, index investing will also come with far less volatility than choosing individual stocks, thereby mitigating some risk.
Although the seven make up a small, concentrated basket of stocks, investors gain exposure to a variety of end-markets, including cloud computing, social media, consumer electronics, electric vehicles (EV), robotics, semiconductors, and e-commerce. Each of these applications is rife for disruption, and AI has myriad opportunities to play a crucial role.
I see the Roundhill Magnificent Seven ETF as an interesting and potentially lucrative way to invest in mega-cap tech all while keeping risk somewhat insulated. While the ETF is heavily concentrated in tech companies, the growth prospects of each holding look robust in the long term. Now could be a unique time to begin building a position in the ETF, as big tech continues to push the markets to new highs.
