Time to Consider Diversification from Magnificent 7? Here’s How.
Tailwinds in the Artificial Intelligence theme have significantly benefitted Nvidia and other mega-cap technology stocks. Shifting some profits into a diversified mix of tech and AI-adjacent equities to mitigate concentration risk is probably prudent.
March 2024
U.S. equity markets are off to a strong start on the year with the S&P 500 Composite Index already up 6.3%, slightly trailing the 6.5% return of the Nasdaq 100 Index. The year-to-date rally has been a continuation of the rise in risk assets that started in late October of last year.
Featured Funds
Key Benefits
- Gain access to U.S. equities with historical track record of growth.
- Maintain some exposure to Magnificent 7 while reducing concentration risk.
- Funds positioned to benefit from innovation trends over the next decade.
Diversifying Away from Nvidia and Magnificent 7
A closer look at the composition of the rally so far this year shows the majority of the returns have come from Nvidia Corp. and to a lesser extent from Microsoft Corp. Tailwinds in the Artificial Intelligence (“A.I.”) theme have significantly benefitted Nvidia with the stock up more than 1,950% in the last five years.
Although expectations have become ever loftier, the semiconductor company continues to significantly exceed analyst targets on its quarterly earnings. This makes it challenging for investors to fully divest the stock, though taking some profits at this point would certainly be prudent. Both Nvidia and the Magnificent 7 (consisting of Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms and Tesla) are notably outpacing the S&P 500 Composite Index over the last three years.
Nvidia & Magnificent 7 vs. Broader Market
At this point in the cycle, our view is that investors may well want to consider diversifying away from Nvidia and other Magnificent 7 stocks by utilizing a broader-based mutual fund. By doing so, investors can maintain exposure, while reducing overall concentration risk. Given most of the rally in recent months was driven on hopes of aggressive rate cuts by the U.S. Federal Reserve, strong economic data leading to a less dovish policy environment may warrant broadening out equity exposure to a portfolio of stocks rather than single securities that may be more vulnerable to price corrections.
There are a number of ways in which investors can diversify while maintaining exposure to Nvidia and/or the Magnificent 7.
Below are two options worth exploring:
1) BMO Nasdaq 100 Equity ETF Fund
Diversification Benefits:
- Seeks to track the performance of a broad-based U.S. equities market index.
- Has exposure to the Magnificent 7 alongside other blue-chip, growth-oriented companies.
- Management Expense Ratio of 0.40% (Series F, as of 30/09/2023).
Diversification Benefits:
- Fund positioned to benefit from innovation trend over the next decade.
- Multi-Sector approach to Innovation Investing.
- Deeply experienced management team with over 20 years in technology and innovation investing.
- Management Expense Ratio of 1.05% (Series F, as of 30/09/2023).
Fund Codes:
BMO Nasdaq 100 Equity ETF Fund
| FundServ Codes | Front End1 | MER (%) |
|---|---|---|
| Advisor | - | - |
| T6 | - | |
| F (Fee-based) | BMO95120 | 0.40% |
| F6 | - | - |
BMO Global Innovators Fund
| FundServ Codes | Front End1 | MER (%) |
|---|---|---|
| Advisor | BMO99164 | 2.05% |
| T6 | BMO34269 | 2.14% |
| F (Fee-based) | BMO95164 | 1.05% |
| F6 | BMO36164 | 1.06% |
1 Front End = Sales Charge. MER as of September 30, 2023.
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