Worried about Magnificent Seven concentration risk? These ASX ETFs offer varied exposure

The Magnificent Seven makes up about a third of the S&P 500's total market capitalisation.

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Many Aussies are invested in US shares via index-based ASX exchange-traded funds (ETFs).

The iShares Core S&P 500 AUD ETF (ASX: IVV), which tracks the 500 largest listed US companies by market capitalisation is a popular option.

In fact, Stake market analyst Samy Sriram says it was the most popular equity purchased by Aussie investors via the online trading platform last year.

Investing in 500 companies in the world's biggest economy sounds like good diversification.

But the Magnificent Seven stocks of Apple, Nvidia, Meta, Microsoft, Telsa, Alphabet, and Amazon comprise an enormous chunk of the S&P 500 Index (SP: .INX).

Currently, that chunk is a whopping 32.5% of the index's total market cap.

If you own ASX IVV, that means 32.5% of your money is invested in these seven stocks.

That presents some concentration risk, which can work for you or against you.

It was advantageous last year.

Many analysts say the Magnificent Seven is the main reason the S&P 500 vastly outperformed the ASX 200, rising by 23.31% and delivering total returns (including dividends) of 25.02% in 2024.

But what about last week, when the market became aware of China's DeepSeek artificial intelligence product, and Nvidia suffered the biggest one-day fall in market cap in the US stock market's history?

Three other Mag 7 stocks were also hit. Alphabet shares dropped by 4.2%, Tesla shares lost 2.3%, and Microsoft stock fell 2.14%. The S&P 500 fell by 1.5%.

The market dive alerted investors to the negative side of the Mag 7's concentration within the S&P 500.

Chuck Carlson, CEO of Horizon Investment Services, told Reuters:

You run the risk when you have concentration that you have selloffs like this.

It's certainly going to raise questions in terms of how investors are positioning portfolios.

Should investors be worried about concentration risk?

Analysts have divergent views on the concentration risk of the Mag 7.

Michael Hunstad, Northern Trust's chief investment officer for global equities, is unperturbed by the seven stocks' high valuations.

He says:

Today, the biggest technology companies have among the highest earnings growth, profit margins, capital expenditures and free cash flow generation in the S&P 500 index.

While they also have higher price-to-earnings ratios, we feel these multiples are justified by strong fundamentals.

Nick Griffin, chief investment officer of active fund manager Munro Partners, says their main portfolio has about a 25% weighting in Magnificent Seven stocks (but the fund only owns five of them).

He explained why on ABC's The Business program:

At the moment we're happy with the 25% weighting, that's lower than we've been for a while. We're happy with that weighting … because these companies are globally dominant.

… Microsoft is the software company for the world, Facebook is a social network for the world … Amazon is e-commerce for the world.

So, these companies are big and dominant but also globally significant. So those those weights sort of make sense when you think about it in that context.

An active fund manager like Munro can protect investors from concentration risk by monitoring the Mag 7's performance and making adjustments as necessary.

For example, Griffin explained that they have excluded Tesla in Munro's main portfolio due to its high valuation and Apple because they predict little growth in iPhone sales ahead.

However, many ordinary investors do not want to pay for active management and prefer index-based investing via ASX ETFs.

So, what can you do if you're an ASX ETF investor who wants to be invested in US shares but is worried about the Mag 7 concentration risk?

One option is to spread your investments over several ASX ETFs that have varied degrees of exposure to the Magnificent Seven stocks.

Here are some examples.

5 ASX ETFs offering varied exposure to the Magnificent Seven

Betashares Global Quality Leaders ETF (ASX: QLTY)

The Betashares Global Quality Leaders ETF (ASX: QLTY) has 7.8% exposure to the Mag 7 stocks, but it only holds Meta Platforms, Alphabet, Microsoft, and Nvidia.

This ASX ETF tracks the iSTOXX MUTB Global Ex-Australia Quality Leaders 150 Index, run by Stoxx.

The QLTY ETF invests in 150 companies worldwide that meet four specific quality criteria.

The criteria are a high return on equity (ROE), low debt-to-capital, good cash flow, and earnings stability.

Since its inception in 2018, its total returns have averaged 15.61% per annum.

VanEck Vectors Morningstar Wide Moat ETF (ASX: MOAT)

The VanEck Vectors Morningstar Wide Moat ETF (ASX: MOAT) has 5.5% exposure to the Mag 7 stocks, but it only holds Alphabet, Amazon, and Microsoft shares.

This ASX ETF tracks the Morningstar Wide Moat Focus NR AUD Index, run by Morningstar.

The MOAT ETF is invested in 51 US companies that the Morningstar equity team deems to have strong and durable moats (sustainable competitive advantages).

Since its inception in 2015, its total returns have averaged 16.16% per annum.

Vanguard MSCI Index International Shares ETF (ASX: VGS)

The Vanguard MSCI Index International Shares ETF (ASX: VGS) has 24.2% exposure to the Mag 7 and holds all seven companies.

This ASX ETF tracks the MSCI World ex-Australia (with net dividends reinvested) AUD Index, run by MSCI.

The VGS ETF focuses on large companies with global earnings bases. It holds 1,352 stocks, and about 80% of them are large-caps. US shares dominate the portfolio at 73%.

Since its inception in 2014, its total returns have averaged 13.74% per annum.

iShares Global 100 AUD ETF (ASX: IOO)

The iShares Global 100 ETF (ASX: IOO) has 47.4% exposure to the Mag 7, but it only holds Alphabet, Amazon, Nvidia, Apple, and Microsoft shares.

This ASX ETF tracks the S&P Global 100 Index, run by S&P Global.

The IOO ETF invests in 100 of the world's largest companies in developed and emerging markets. About 80% of the portfolio consists of US stocks.

Since its inception in 2000, its total returns have averaged 6.59% per annum.

What if you want high exposure to the Mag 7?

Here's an ASX ETF providing twice the Mag 7 concentration as the S&P 500.

Global X Fang+ ETF (ASX: FANG)

The Global X Fang+ ETF (ASX: FANG) has 60% exposure to the Magnificent Seven. It does not own Tesla.

It tracks the NYSE FANG+ Index, run by ICE Data Indices.

The FANG+ ETF only invests in 10 companies. Six are from the Mag 7. The others are Crowdstrike, Netflix, Broadcom, and ServiceNow Inc.

Since its inception in 2020, the Fang+ ETF's total returns have averaged 30.5% per annum.

The Fang+ ETF topped the list of best-performing international ASX ETFs for total returns in 2024.

The ETF delivered an outstanding one-year return of 65.08%, largely because of its Mag 7 concentration.

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, 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. Motley Fool contributor Bronwyn Allen has positions in iShares S&P 500 ETF. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Apple, CrowdStrike, Meta Platforms, Microsoft, Netflix, Nvidia, ServiceNow, Tesla, and iShares S&P 500 ETF. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Broadcom and has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Alphabet, Amazon, Apple, CrowdStrike, Meta Platforms, Microsoft, Netflix, Nvidia, ServiceNow, VanEck Morningstar Wide Moat ETF, Vanguard Msci Index International Shares ETF, and iShares S&P 500 ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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