Magnificent 7 stocks: How to invest in tech's power players

A few months ago, the market was dazzled by a handful of tech stocks in the US. This gang of tech titans, commonly known as the Magnificent Seven, rallied on the belief that they are to benefit the most from the development and adoption of artificial intelligence, as it is heralding a paradigm shift in how we work and live.

This bore fruits for investors in 2023. Dubbed the “Magnificent 7”, those seven companies saw their share prices skyrocket by an impressive 112% on average. They contributed to most of the already-remarkable gain of 26.3% in the S&P 500 index.

But what exactly are Magnificent 7 companies? In this article, we will explore more about those companies and how you can invest in them. 

Enter the Magnificent 7 stocks

Bank of America analyst Michael Hartnett came up with the term Magnificent 7 in 2023, borrowing from a Western film of the same name consisting of a powerful group of seven men back in the 1960s.

As forceful and adventurous, the Magnificent 7 in today’s stock market context consists of:

• Alphabet (GOOG), 
• Amazon (AMZN), 
• Apple (AAPL), 
• Meta Platforms (formerly Facebook) (META), 
• Microsoft (MSFT), 
• Nvidia (NVDA), and 
• Tesla (TSLA) 

These investors' darlings have shown their strategic position in this era of technological advancements in artificial intelligence (AI), cloud computing, and cutting-edge hardware and software solutions. The large-cap stocks boast not only impressive market capitalisations (ranging from Tesla's US$576 billion to Microsoft’s staggering US$3.01 trillion) but also a five-year return that leaves most companies in the dust. 

Why consider technology as a whole?‍

The Magnificent 7 stocks stand as testaments to the transformative power of technology. The companies have shown growing significance and impressive returns so far. But beyond those seven mega stocks, exploring the tech industry has its merits.  

Technological adoption has become a critical indicator of the success of a business, and companies across many industries are spending more on technology-related investments to improve their competitive advantage. Even in seemingly “unrelated” industries where technology previously was not actively used, such as in agriculture and education, people are turning to tech to supercharge their growth and be more efficient. 

Given the historical trajectory, as well as the ongoing advancements in technology and its growing application beyond our imaginations, technology is likely to continue to be top of mind for companies and therefore, remain a key pillar in the global equity market. 

While the direction of the development is clear, this doesn’t always represent how capital markets are operated.

Less than three months into the new year, the view on Magnificent 7 stocks starts to diverge. As Nvidia continues its rally to a scale that stands shoulder to shoulder with the collective value of all Chinese companies listed in Hong Kong, leaving some Magnificent 7 members behind. Throughout history, the S&P 500 index has consistently reached new peaks, yet beneath the surface lies the reality that individual stocks are not immune to challenges. Over a 20-year rolling period, the delisted companies account for half of the market with almost 20% regarded as “bad delists,” according to Dimensional. 

Jack Bogle, the founder of Vanguard, wisely advised us: “Don’t look for the needle in the haystack. Just buy the haystack!” Averaging down on low-cost, broadly diversified portfolios has proven to be a better buy. Whether it is the AI theme or other areas, clients with high conviction in specific sectors or markets can consider investing in a diversified satellite portfolio to complement their core allocations. This is only given that investors begin with the core portfolios as the anchor representing a meaningful allocation. 

Use a core-satellite approach

Satellite strategy is a peripheral portion in your portfolio. While investors should and do start with the core portfolios as the anchor representing a meaningful allocation, the satellite portion is used for tactical or opportunistic positions to reflect a high conviction in certain markets or sectors. 

While there are passive strategies in the market, most satellite portfolios and funds tend to be active in the way they invest and seek to generate alpha, or excess return over a selected benchmark index. Therefore, the technology satellite portfolio could become more concentrated and narrow in exposure, targeting a certain sector, country or theme.

It’s often compared to the core portfolio, which has a strategic, long-term nature. Together, they form a core-satellite approach.

3 don’ts investors should be aware of 

While the allure of high growth and innovation makes technology companies attractive, it's crucial to acknowledge the inherent risks involved. 

1. Don’t over-concentrate

Do not concentrate all your assets in a single basket. These seven stocks seem attractive now, as they may in the future, you should look at investments with a much wider lens. Imagine you double down on just seven names from almost the same vertical, in the Magnificent 7’s case, your portfolio will benefit from the success but is also vulnerable to risks specific to this sector. Additionally, technology sector is now around 29% of the total S&P 500 index. For your broader portfolio, you should look at allocations holistically–Chances are that tech exposure in your portfolio may add up to a greater weightage than what you intend to allocate.

2. Don’t overlook regulatory risks

Another significant threat to the entire sector is the ever-evolving regulatory landscape. The allure of investing in AI lies in its emerging nature. However, this very characteristic also prompts governments to hastily adapt to the rapid pace of technological development, often leading to stricter regulations. From data privacy and content moderation to antitrust concerns and national security, these regulations can upend the entire business models, as seen with recent antitrust challenges faced by tech giants such as Alphabet, for example. This adds to uncertainty and market volatility in stock prices.

3. Don't be distracted by shiny objects

Before the Magnificent 7, there was FAANG - an acronym for Facebook (now Meta), Amazon, Apple, Netflix, and Google. And some have even moved on from the Magnificent 7 to eye on opportunities from the Fab 5, removing Apple and Tesla from the Magnificent group. It's tempting to be drifted by the latest hot stocks or trends that cause the buzz. But remember, catchy names and hype don't automatically make great investments.

Instead of being swayed by trends, dig deeper and understand the companies themselves. Analyse their financials, business models, competitive landscape, and long-term prospects.

While we cannot predict the markets in the short term and past performance is not an indication of future returns, the history of financial markets clearly informs us that staying invested over the long term gives us time in the market, which will always win out in the long term. 

Ways to get exposure to the technology sector

While the technology sector sounds promising, investing in it may not be for everyone. You have to consider your risk appetite and financial goals before dipping your toes into this sector, which is volatile in nature. Remember high returns in growth-oriented stocks like the Magnificent 7, come with a higher risk of losses. If you are ready, here are three routes to consider. 

Individual stocks

For investors comfortable with in-depth research and managing volatility, buying shares of specific companies like the Magnificent 7 provides direct exposure and potentially higher returns. However, this approach requires significant time and expertise to analyse individual companies’ competitive landscapes, financial statements, management teams, and prospects, among other things.

Exchange-traded funds (ETFs) 

For broader diversification and lower risk, ETFs tracking major tech indices like the Nasdaq-100 or S&P 500 technology sector can be ideal. These passively managed funds offer instant exposure to a basket of tech companies, mitigating individual company risk. However, they may underperform high-flying stocks within the sector. 

Unit trusts through Endowus

Actively managed mutual funds or unit trusts offer professional expertise in selecting and managing tech stocks. The portfolios of technology or broad market equities are helmed by experienced managers, typically backed by a team of sector research specialists.

While the common refrain is that unit trusts are expensive, Endowus aims to bring fund investing to the masses with low, fair fees. Fund management companies charge a flat management fee. As Endowus is not commissions-based and our fees do not impose any sales charges, fees for buying mutual funds are less than half the industry average. This is an intentional act so we can ensure our advice is aligned solely with your needs.

The platform offers the best-in-class funds that investors can consider. This includes the Endowus Technology Portfolio and low-cost S&P 500 funds such as BlackRock’s iShares US Index Fund and the Amundi Prime USA Fund. 

The Endowus Technology Portfolio remains well-positioned to capture the upside during market rebounds and will perform attractively in the long run. The portfolio, part of Endowus’ Satellite offerings, gives investors access to the most technologically innovative companies globally.

Remember, each approach has its advantages and drawbacks. Consider your risk tolerance, investment goals, and research capacity before deciding on the path to take. Regardless of your chosen path, keep in mind to invest wisely with the long term in mind and not to chase past trends.

The tech sector is notorious for its rapid shifts and unpredictable nature, which can test even the most seasoned investors' resolve. However, it's precisely this characteristic that often presents lucrative opportunities for those willing to ride out the ups and downs with a long time horizon. 

As with all investments, predicting the timing of the entry and exit points is incredibly difficult. For long-term investors, consider a dollar-cost averaging approach if it suits your needs.