Selling Stock Concentration Is the ETF Industry’s New Big Idea – BNN Bloomberg

(Bloomberg) — Wall Street is launching a new generation of ETFs with varying degrees of exposure — or lack thereof — to mega-cap technology stocks, which are emerging from a rout Wednesday that underscored concerns about strained valuations.

For investors looking for a rebound in the Big Tech cohort, which seemed likely early Thursday after Tesla Inc. reported explosive results, BlackRock Inc. introduces the iShares Nasdaq Top 30 Stocks ETF (ticker QTOP) and the iShares Top 20 US Stocks. ETF (TOPT). These exchange-traded funds will track the largest stocks in the tech-heavy Nasdaq 100 index and the S&P 500, respectively. Tech giants are the largest members of both gauges.

And for those who want to bypass the giants and continue betting on stock market gains, the world’s largest asset manager is launching the iShares Nasdaq-100 ex Top 30 ETF (QNXT), which gives exposure to the 31st and 100th most large companies. market value in the benchmark index.

The products come at a key time, when members of the Magnificent Seven begin reporting quarterly results that could be decisive in determining where the market goes next. Tesla kicked off the group’s announcements Wednesday evening. Others – Apple Inc., Microsoft Corp., Alphabet Inc., Amazon.com Inc., Nvidia Corp. and Meta Platforms Inc. – will follow starting next week.

Investors are eagerly awaiting the latest information on when these companies’ investments in AI will pay off. Since the launch of OpenAI’s ChatGPT in 2022 sparked the frenzy, billions of dollars have been invested in their stocks. But Wednesday’s sharp selloff highlighted anxiety over whether investors’ expectations would prove too high.

The strength in tech stocks has “been largely driven by AI spending, but at some point this will have to translate into efficiencies for end users, not just purchases that benefit hardware vendors and software,” said Steve Sosnick, chief investment officer. strategist at Interactive Brokers. “We hope to learn a lot more about this in upcoming earnings conference calls.”

An index that tracks the Magnificent Seven is up more than 40% this year through Wednesday’s close, about double the advance of the S&P 500 and Nasdaq 100. The Roundhill Magnificent Seven ETF (MAGS) has ballooned to about $770 million in assets, from $36 million at the start of the year.

Optimism about the prospects of artificial intelligence has been such a pillar of market strength this year that BlackRock this week launched an ETF that tracks AI companies globally.

Worry about concentration

And yet the concentrated nature of this year’s market rally also raises concerns, particularly when Wall Street forecasts that earnings growth at Magnificent Seven companies will slow on average. Stocks are expected to average 19% earnings growth in the third quarter, the smallest increase since the start of 2023, according to data compiled by Bloomberg Intelligence.

For investors looking to strip away the influence of the biggest tech giants, this week also marked the launch of the Defiance Large Cap ex-Mag 7 ETF (XMAG), which tracks the S&P 500 without the so-called Magnificent Seven stocks .

“Companies are trying to reduce this exposure by creating funds that are not exposed to Mag Seven,” said Mohit Bajaj, director of ETFs at WallachBeth Capital.

Investors have poured nearly $24 billion into technology-related ETFs this year, the most among the 12 sectors tracked by Bloomberg Intelligence, and quadrupled that figure for all of last year.

Eventually, the market will widen, says Goldman Sachs Group Inc., setting the stage for the equal-weighted S&P 500 index to outperform the market-cap-weighted benchmark over the next decade . For now, the equally weighted indicator – the one that gives Target Corp. as much influence as Microsoft – lags the regular S&P 500 by 6 percentage points year to date.

“No one complained about this rise because these companies dominated the S&P 500 and the Nasdaq,” said Amrita Nandakumar, president of Vident Asset Management. “Now some investors are looking at their portfolios and wondering how much of those gains they would have to give back if the tech sector took a hit. »

–With the help of Vildana Hajric and Alexandra Semenova.

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