In recent years, investment portfolios have increasingly been influenced by the meteoric rise of major technology companies—often referred to as the “Magnificent Seven.” This group, comprising Apple, Microsoft, Nvidia, Amazon, Meta Platforms, Alphabet, and Tesla, has not only dominated the headlines but has also substantially affected market indexes like the S&P 500. While their growth has brought about significant gains, it raises a critical question about portfolio diversification. Are investors unintentionally exposing themselves to undue risk by placing disproportionate trust in these tech titans?
John Davi, CEO of Astoria Portfolio Advisors, has been vocal about the dangers of over-reliance on these leading tech companies. He asserts that the S&P 500’s structure is gravitating too heavily towards these giants, thereby rendering it less representative of a balanced investment strategy. As Davi puts it, “Those Mag Seven stocks are very expensive right now.” This statement encapsulates the pressing need for investors to rethink their allocation strategies—to potentially “rotate” offices away from these high-flying stocks and explore a more diversified approach.
The historical context cannot be overlooked; the market’s increase is significantly attributed to these top firms. As of January 31, the combined weight of the top ten stocks in the S&P 500 accounted for approximately 36% of its total value. Such concentration poses a risk since poor performance by these companies could lead to severe repercussions for an investor’s portfolio.
Davi’s firm has developed an intriguing solution for long-term investors seeking to mitigate risk while still chasing quality returns. The Astoria US Equity Weight Quality Kings ETF (ticker ROE) aims to facilitate investment in 100 of the highest quality large and mid-cap U.S. firms without the drawbacks of market-cap weightings that could lead to significant concentration risks. According to the structure of this ETF, each stock is weighted equally at roughly 1%, contrasting sharply with the heavy reliance on a few tech companies in traditional indices.
Since its inception on July 31, 2023, the ROE ETF has yielded more than 26% returns, showcasing a robust performance, yet it’s essential to note that the S&P 500 itself has surged by 32% over the same timeframe. This raises pertinent discussions on whether setting aside traditional strategies in favor of more innovative investment options proves beneficial in the long run.
For investors determined to step beyond the shadow of Big Tech, there are numerous ETF options available that focus on quality and growth. For example, VettaFi’s Todd Rosenbluth points to Invesco’s S&P 500 Quality ETF (SPHQ) as an alternative. Investors keen on further refining their strategies could also consider American Century’s ETF (QGRO), which incorporates additional filters for quality and growth.
In an investment landscape that is continuously evolving, finding a diversified portfolio can be challenging yet critical. The dominance of major tech companies should not deter investors from exploring new avenues. Instead, this presents an opportunity to reassess and reshape their strategies while pursuing sustainable growth in a complex market environment.