Would you like to invest in? "Magnificent Seven" Shares? Buy this top ETF.

The Magnificent Seven stocks have delivered great returns over the years. The seven companies focused on technology megatrends – Apple, Amazon, alphabet, Metaplatforms, Microsoft, NvidiaAnd Tesla – completely wiped out the S&P 500:

Magnificent collection of seven

1 year return policy

5 year return policy

10 year returns

Apple

36%

358%

906%

Amazon

64%

78%

765%

Alphabet (Google)

43%

154%

380%

Metaplatforms (Facebook)

182%

132%

441%

Microsoft

51%

242%

844%

Nvidia

175%

1170%

10510%

Tesla

31%

860%

1600%

S&P 500

17%

76%

150%

Data source: Ycharts.

The technology trends driving their market-breaking returns (e.g. artificial intelligence, cloud computing, e-commerce and electric vehicles) still have a long way to go for growth. This could give the Magnificent Seven the strength to continue to excel. However, instead of buying all seven stocks, investors could consider an even more passive approach and invest in an exchange-traded fund (ETF) with a high concentration of these stocks. The Invesco QQQ Trust (QQQ 0.80%) is notable for its outsized involvement in the Magnificent Seven.

What is Invesco QQQ Trust?

The Invesco QQQ was introduced more than two decades ago. It tracks the Nasdaq-100 Index, an index of the 100 largest non-financial companies listed on the Nasdaq stock exchange. The Invesco QQQ has become one of the largest ETFs by assets under management (AUM). The company currently holds over $220 billion in client assets, making it one of the five largest ETFs worldwide by AUM. It is the second most traded ETF in the US based on average trading volume, underscoring its popularity among investors.

The ETF has also been one of the top performers over the years. It has delivered an average annual total return of 17% over the past decade, compared to an average annual total return of nearly 10% for the S&P 500. With this ETF, a $10,000 investment a decade ago would be nearly $50,000 today grown. For comparison, the same investment in an S&P 500 index would have grown to only about $30,000.

The reason for this outperformance is the underlying growth of the companies in the index. This group has grown much faster than other benchmarks over the past 10 years:

Metric

Nasdaq-100

S&P 500

Russell 1000

revenue

9.9%

4.9%

5.9%

Merits

12.9%

8.5%

9.3%

Dividends

11.4%

7.8%

6.9%

Average annual growth rates over 10 years. Data source: Invesco.

Concentration has played a key role in the index’s outsized growth. It holds 100 companies (as opposed to 500 or 1,000) that are heavily focused on faster-growing stock market sectors (technology accounted for 57% of holdings). This focus on companies that benefit from major growth trends has contributed to faster financial growth and higher shareholder returns.

A great way to play the Magnificent Seven

Invesco QQQ Trust is in a great position to continue to outperform as it focuses on companies with outsized growth prospects. Everything starts at the top. The fund’s top holdings are the Magnificent Seven stocks:

  • Apple: 10.8% of the fund’s holdings.
  • Microsoft: 9.5%
  • Amazon: 5.3%.
  • Nvidia: 4.3%
  • Metaplatforms: 3.8%.
  • Tesla: 3.2%.
  • Alphabet: 3.1% (Class A Shares) and 3.1% (Class C Shares)

Overall, these seven companies make up 43% of the fund’s holdings, while the other 93 stocks make up the remaining 57%. That’s almost double their weighting in the S&P 500 (and related S&P 500-aligned ETFs). Because of their outsized weighting in the index, these companies contribute to higher returns compared to the S&P 500.

The group has outperformed the market this year. According to data from Goldman SachsBy mid-November, they had gained an average of 71%, compared with an average gain of 6% for the other 493 stocks in the S&P 500 index. Without the Magnificent Seven’s huge gains and large allocation, the index would not have risen 19% this year.

Goldman Sachs expects the Magnificent Seven to have another strong year in 2024 and predicts they will outperform the S&P 500 again. An analyst at the investment bank wrote: “The seven stocks have faster expected revenue growth, higher margins, higher reinvestment ratios, etc.” They have stronger balance sheets than the other 493 stocks and, after accounting for expected growth, trade at a relative valuation that is equal to the corresponds to recent average values. Given the Nasdaq-00’s higher weighting in this group, the Invesco QQQ is a great way to capture their potential for sustained outperformance.

Concentrated at the top

The Invesco QQQ has been a great ETF investment over the years. The company has delivered superior returns for its investors as it focuses on owning some of the fastest-growing companies capitalizing on technological megatrends. This makes this ETF a great way to passively invest in the Magnificent Seven.

Suzanne Frey, an executive at Alphabet, 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. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Matthew DiLallo has positions at Alphabet, Amazon, Apple, Meta Platforms and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Goldman Sachs Group, Meta Platforms, Microsoft, Nvidia and Tesla. The Motley Fool has a disclosure policy.


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