Forget the "Magnificent Seven": This ETF Is a Better Choice for the Artificial Intelligence (AI) Era – The Globe and Mail
There’s no question about it. The “Magnificent Seven” dominated the stock market in 2023.
An evenly divided basket of the group of elite tech stocks that includes Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta Platforms, and Tesla would have jumped an incredible 111% last year, and every one of those stocks gained at least 48% in 2023.
However, this year, this group of elite tech stocks suddenly doesn’t look so magnificent. As the following chart shows, the performance of most of these seven stocks is more middling so far this year.
NVDA data by YCharts
Two of the stocks on the list, Tesla and Apple, are outright losers so far this year. Tesla’s production growth is expected to slow significantly this year amid a challenging market for electric vehicles (EVs), while Apple has faced weak demand in China and its overall revenue growth is near flat.
Alphabet, meanwhile, has sputtered as the market is skeptical of its latest artificial intelligence (AI) chatbot launch, Gemini, and it’s losing market share to Meta in advertising. Only Nvidia and Meta, the two best performers on the Magnificent Seven last year, have continued to dazzle the market in 2024. So far this year, the Magnificent Seven basket has returned 14%, which is outpacing the S&P 500‘s gain of 7.3%, but if you take away Nvidia, the remaining stocks have underperformed the S&P 500.
Image source: Getty Images.
It’s becoming clear that not every Magnificent Seven tech stock is positioned to be a winner in the current environment, and the three stocks that have underperformed the market so far this year have done so for a reason.
For investors looking for exposure to the AI boom, there’s a better choice than the Magnificent Seven. That’s the VanEck Semiconductor ETF (NASDAQ: SMH), and it’s easily beating the Magnificent Seven this year with a 25% gain:
NVDA data by YCharts
As you might guess from its name, the VanEck Semiconductor ETF holds chip stocks, and that sector has soared since the launch of ChatGPT as demand for AI hardware such as Nvidia’s GPUs has skyrocketed.
Nvidia’s success is one big reason the VanEck Semiconductor ETF has surged. The AI chip titan is its biggest holding, making up 28% of the total fund. The rest of its top five holdings include Taiwan Semiconductor Manufacturing at 9.7%, Advanced Micro Devices at 5.7%, Broadcom at 5.5%, and ASML Holding at 5%.
Here you can see the performance of all five:
NVDA data by YCharts
Nvidia is the clear star of this group as well, but all five of these stocks have outperformed the S&P 500, showing that the AI-focused ETF is more than just Nvidia.
ETFs offer a number of benefits, including built-in diversification and rebalancing, taking care of much of the work of monitoring and managing your stocks.
Of course, the VanEck Semiconductor ETF isn’t diversified across sector lines, but it does offer exposure to a wide swath of semiconductor stocks. The fund tracks the MVIS U.S. Listed Semiconductor 25 Index, which holds the 25 largest and most liquid U.S. exchange-listed companies in the semiconductor industry. Companies in the index must generate at least 50% of their revenue from semiconductors or semiconductor equipment.
The ETF, and the underlying index, have a long track record of beating the market. Since its inception in December 2011, the fund has generated an average annual return of 25.8%, turning $10,000 into more than $170,000. It also has a relatively modest expense ratio of 0.35%, meaning investors pay just $0.35 annually for every $100 they have invested in the fund. Given its track record, that seems well worth the cost, and its price-to-earnings ratio also looks reasonable at just 19.
If you like the Magnificent Seven, the VanEck Semiconductor ETF seems like a better way to get exposure to the AI boom, as you’ll get a diverse set of the top chip companies, many of which look set to benefit from the growth of AI.
It’s no accident that the ETF has crushed the market over its history. Expect it to continue to outperform over the coming years.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon, Broadcom, and Meta Platforms. The Motley Fool has positions in and recommends ASML, Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
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