The Roundhill Magnificent Seven ETF (MAGS +1.20%) is the type of investment product that sounds exciting, but that most investors should think twice about buying.
Here's what you need to know about this exchange-traded fund (ETF) before you make the mistake of buying something that isn't worth the price of admission.
Roundhill Magnificent Seven ETF lives up to its name
This fund isn't a particularly complicated ETF. It owns the seven stocks that Wall Street has dubbed the "Magnificent Seven." The seven stocks?
- Nvidia (NVDA +2.72%)
- Alphabet (GOOG +2.66%)
- Apple (AAPL +1.05%)
- Tesla (TSLA +0.49%)
- Amazon (AMZN +0.20%)
- Microsoft (MSFT +0.17%)
- Meta Platforms (META +0.40%)
The ETF is equally weighted, so each one is given roughly the same percentage of assets.
Image source: Getty Images.
That's it -- that's all the ETF does. If you are looking for exposure to this very short list of technology companies, Roundhill's ETF will be a quick, one-stop solution to your needs. For the privilege of owning the ETF, however, you'll have to pay an expense ratio of 0.29%. While that's not a huge number on an absolute basis, Vanguard Total Stock Market ETF charges an expense ratio of just 0.03% for a portfolio of over 3,700 stocks that are market-cap-weighted. That's a lot more effort for a lot less money.
Still, if you only have a small amount of cash to invest, Roundhill Magnificent Seven ETF is a quick solution. Of course, you could also create this portfolio yourself by working with a broker that provides free trades and allows for fractional share ownership. Robinhood Markets allows both, meaning you could effectively recreate Roundhill Magnificent Seven ETF's portfolio for free. And given that there are only seven stocks in the portfolio, it wouldn't require all that much effort.
The really big problem with Roundhill Magnificent Seven ETF
The next thing you have to consider here is the logic behind this ETF. These are seven currently popular technology stocks. That means you are heavily concentrated in one sector, which is a diversification risk. However, the more important issue here is that all seven of the stocks are hot stocks on Wall Street. That makes the Magnificent Seven something of a fad investment approach. And a highly concentrated fad investment approach, given the small number of stocks that are all from one sector.
NYSEMKT: MAGS
Key Data Points
Fads come and go on Wall Street. One of the biggest fads was the so-called Nifty Fifty. That was a group of 50 large stocks that were popular in the 1960s and 1970s. The draw was that they seemed to just keep going up without fail. But the Nifty Fifty investment fad eventually waned, and many of the stocks succumbed to deep financial difficulties, including Polaroid, General Electric (now GE Aerospace), and Xerox. The Nifty Fifty was a far more diverse list of companies, so it probably would have made a better ETF than the Magnificent Seven. However, the point is that Wall Street fads end, and often that end is dramatic and painful.
That highlights the real problem here. Wall Street provides services and products to investors. It has to make sure that it is providing the services and products that investors want to pay for, but sometimes finance firms push things a little too far. Selling an expensive product based on a faddish list of popular stocks is likely to turn out to be an example of Wall Street going too far.
Don't get caught up in the fad
Just because someone built an ETF that tracks the Magnificent Seven doesn't mean you have to buy it. Sure, it sounds exciting to buy the Magnificent Seven in one quick and easy trade today, but you are paying a very large fee for that privilege, and eventually this small list of popular stocks will likely fall out of favor. When that happens Roundhill Magnificent Seven ETF will be in the Wall Street dog house, and very few investors will be happy to own it.
