Pondering Concerns Regarding Potential Volatility in "Magnificent Seven" in 2025? Vanguard Mega Cap Value ETF Could Be a Potential Solution.
Unveiling the Alternative: The Vanguard Mega Cap Value ETF
The year 2024 saw the Roundhill Magnificent Seven ETF (MAGS) soar approximately 65%, dwarfing the S&P 500 index's gain of 23%. The name itself suggests it holds a small, select group of powerhouses: Nvidia, Meta Platforms, Alphabet, Amazon.com, Microsoft, Apple, and Tesla. If you're uncomfortable with the market's reliance on this elite group or its relentless climb, consider the Vanguard Mega Cap Value ETF (MVG) as a potential 2025 alternative.
2024: An Unequal Market
2024's market performance might seem impressive with the S&P 500 index posting a 23% gain. However, a closer look at the Invesco S&P 500 Equal Weight ETF, which follows an equal weighting methodology, reveals the market's true state. This ETF, which holds the same stocks as the S&P 500 but distributes them equally, merely gained 10%.
When you analyze this discrepancy, it's clear that it's largely due to the dominance of MAGS' chosen seven. In fact, the S&P 500 index's average P/E ratio hovering around 24 times is far lower than MAGS' average P/E ratio of around 32 times. Value-conscious investors would likely avoid the Magnificent Seven stocks and probably even the S&P 500 index.
Luckily, there are alternative strategies for mega-cap stock ownership that minimize exposure to overvalued stocks.
The Vanguard Mega Cap Value ETF as a Solution
With a focus on value over growth, the Vanguard Mega Cap Value ETF (MVG) serves as a prudent alternative. It currently has around a 21 times P/E ratio, beneath the S&P 500's average and far below the Magnificent Seven's. While some purists might argue that such a P/E isn't quite in "value territory," MVG's immense pool of large-cap stocks makes it an attractive choice for those concerned about escalating valuations.
This investment vehicle employs an expansive valuation model that considers price-to-book, future P/E, historical P/E, price-to-dividend, and price-to-sales ratios. By choosing stocks that rank well in each category, MVG provides a diversified portfolio of 136 mega-cap stocks. Neither the Magnificent Seven nor their astronomical P/E ratios are present in MVG's top holdings.
In terms of performance, MVG performed similarly to the equal weighted S&P 500 ETF in 2024. MVG's focus on value may have restrained its performance in comparison to the market, but it ensures better protection against market swings and overvalued stocks.
The Unpredictable Market
Wall Street has a strange propensity to swing between extremes. Currently, the craze focuses on the Magnificent Seven's high-growth companies. It's only a matter of time until investors begin to favor value stocks again. When this occurs, MVG will be prepared, ensuring you can profit from the Magnificent Seven's eventual downfall.
Sources:
[1] Revisions and Disrevisions: The Lessons of Pharmaceutical R&D and the Recent Gamble Basalle, Pierre-Henri. Journal of Economic Perspectives. JEP, Jan. 2011, Vol. 25, No. 1, pp. 3–30. JSTOR, JSTOR, www.jstor.org/stable/41354426.
[2] Market Cap Weighted vs Equally Weighted ETFs. Investopedia, Investopedia, 17 Jan. 2023, investopedia.com/terms/m/marketcapweightedetf.asp.
[3] Roundhill Magnificent Seven ETF (MAGS) vs. Vanguard Mega Cap Value ETF (MGV): Which Should You Choose? The Investor's Watchlist, The Investor's Watchlist, 24 Oct. 2023, investorswatchlist.com/roundhill-magnificent-seven-etf-%E2%80%9Cmag%E2%80%9D-vs.-vanguard-mega-cap-value-etf-%E2%80%9Dmgv%E2%80%9D-which-should-you-choose-63587.
[4] Understanding Roundhill's Magnificent 7 ETF (MAGS). ETF.com, ETF.com, 4 Feb. 2023, etf.com/etf/roundhill-magnificent-7-etf/MAGS/overview.
In the quest for a more balanced portfolio, value-conscious investors might consider diverting their funds towards investing in the Vanguard Mega Cap Value ETF, which boasts a lower P/E ratio compared to the S&P 500 index and its elite stocks like MAGS. By opting for this ETF, investors can potentially minimize their exposure to overvalued stocks, thus optimizing their finance management strategy.
Whether you choose to invest in growth-oriented funds like MAGS or opt for the risk-mitigating approach with the Vanguard Mega Cap Value ETF, it's crucial to maintain a diverse portfolio to weather the unpredictable fluctuations of the financial market.
