The term "Magnificent Seven" was coined by Wall Street in 2023 to describe a group of seven American technology stocks which consistently outperformed the rest of the market. The group remained a dominant force in 2024, delivering an average return of 60.1% for the year:
Those seven companies have a combined value of $17.5 trillion, representing 33.6% of the entire value of the S&P 500 (^GSPC -1.54%). In other words, investors who don't own them probably underperformed the index significantly last year. Given their leadership in powerful new industries like artificial intelligence (AI), that might be the case again in 2025.
Buying an exchange-traded fund (ETF) with a high level of exposure to the Magnificent Seven could be a simpler option for investors compared to buying each stock individually. The Vanguard Mega Cap Growth ETF (MGK -1.55%) offers precisely that -- in fact, more than half of the value of its entire portfolio is tied up in those seven stocks.
A concentrated ETF filled with AI leaders
ETFs can hold hundreds or even thousands of different stocks, but the Vanguard Mega Cap Growth ETF only holds 71, so it's highly concentrated by default. The Magnificent Seven stocks alone account for 58.2% of the entire value of its portfolio, and each of them features in its top 10 positions:
|
Stock |
Vanguard ETF Portfolio Weighting |
|---|---|
|
1. Apple (AAPL -2.41%) |
13.21% |
|
2. Nvidia (NVDA -3.00%) |
12.28% |
|
3. Microsoft (MSFT -1.32%) |
12.12% |
|
4. Amazon (AMZN -1.44%) |
7.16% |
|
5. Meta Platforms (META 0.84%) |
4.69% |
|
6. Tesla (TSLA -0.05%) |
4.00% |
|
7. Eli Lilly |
2.88% |
|
8. Alphabet Class A (GOOGL -0.98%) |
2.61% |
|
9. Visa |
2.27% |
|
10. Alphabet Class C (GOOG -1.14%) |
2.13% |
Data source: Vanguard. Portfolio weightings are accurate as of Nov. 30, 2024, and are subject to change.
The AI industry continues to grow and expand, but together, the Magnificent Seven companies have almost every corner of it covered.
Apple could soon be the biggest distributor of AI to consumers with its Apple Intelligence software, which brings a suite of new features to the latest iPhones, iPads, and Mac computers. Microsoft, Amazon, and Alphabet, on the other hand, operate three of the world's largest cloud platforms, which are go-to destinations for AI developers seeking ready-made large language models (LLMs) and data center computing infrastructure to fuel their AI software projects.
Then there is Nvidia, which supplies the most powerful graphics processors (GPUs) for those data centers. Its latest Blackwell chips -- which started shipping at the end of 2024 -- are the company's most advanced so far when it comes to developing AI models, and demand continues to outstrip supply.
Meta Platforms developed a family of LLMs called Llama, which have become the most popular open-source models in the world with over 600 million downloads. The company also embedded AI into its recommendation engine on Facebook and Instagram to show users more relevant content, which is driving an uptick in the amount of time they spend on each platform.
Finally, Tesla continues to work on its AI-powered self-driving software, which is already available in beta mode for owners of its passenger electric vehicles. Soon, the company will start rolling out its driverless Cybercab, which has the potential to transform the company's economics.
Image source: Getty Images.
The Vanguard ETF can help investors generate market-beating returns
The Vanguard Mega Cap Growth ETF has delivered a compound annual return of 13.3% since its inception in 2007, beating the average annual gain of 10.5% in the S&P 500 over the same period.
However, the ETF has delivered an accelerated return of 19.4% over the past five years on the back of big-tech's dominance over the rest of the market. The S&P rose by just 15.2% annually during the same period.
But the Vanguard ETF isn't designed to be a complete portfolio on its own because it's so heavily weighted to just a small number of stocks, which makes it susceptible to volatility. However, adding it to an existing, diversified portfolio can yield positive results.
Had you invested $10,000 in the S&P 500 in 2020, it would be worth $20,289 today. But had you invested 50% in the S&P and the other 50% in the Vanguard ETF, your $10,000 would be worth $22,277 today instead.
Since the AI boom is still in its early stages, the Magnificent Seven stocks are likely to continue outperforming the rest of the stock market. Global consulting firm PwC estimates AI will add $15.7 trillion to the global economy by 2030, and Cathie Wood's Ark Investment Management pegs that number at a whopping $200 trillion. No matter which forecast is right, AI could be one of the biggest financial opportunities in history.
Therefore, while investors shouldn't bet the farm on the Vanguard ETF alone, they should definitely consider adding it to their portfolio.
