Ways to Target – or Avoid – Big Tech and Megacap Stocks via ETFs Amid AI Frenzy

Big Tech has been the star of the show in the investing universe, but as we hop into October, the party might be losing steam. This week, we’re diving into strategies for investors to manage their exposure to these colossal stocks through several innovative ETFs that have recently hit the market. Let’s break down how you can profit from—or sidestep—this ongoing tech fervor.

The Shift in Big Tech Sentiment

With the meteoric rise of AI, many Big Tech stocks have surged to impressive heights, with Nvidia leading the charge, gaining 183.5% this year alone. However, as investor sentiment starts to cool, signs indicate that the momentum is waning. Investors are now weighing their options, looking to navigate the choppy waters of tech stocks with a sharper focus.

Rachel Aguirre, U.S. Head of iShares Products at BlackRock, noted, “The shape of the U.S. equity market has undergone a massive change over just the last few years.” She points to the growing clout of megacap stocks and how their performance increasingly dictates market dynamics.

New ETFs to Consider

To help investors capitalize on—or abandon—Big Tech exposure, BlackRock has introduced three funds designed to give investors flexibility in their portfolios:

• iShares Top 20 U.S. Stocks ETF (TOPT): This ETF targets the 20 largest companies in the S&P 500.
• iShares Nasdaq Top 30 Stocks ETF (QTOP): This fund provides exposure to the 30 largest stocks in the Nasdaq-100.
• iShares Nasdaq-100 ex Top 30 ETF (QNXT): Perfect for those looking to exclude the heavyweight companies from their portfolios.

Aguirre highlights the importance of these funds: “For those who believe those largest companies will continue to drive outsized returns, then the top 30 is a way to get that targeted exposure.” Conversely, if you think the tech rally is due for a shake-up, the QNXT offers a fresh opportunity.

Spotlight on Performance: Roundhill Magnificent Seven ETF (MAGS)

For a more targeted Big Tech play, look no further than the Roundhill Magnificent Seven ETF (MAGS). This ETF holds stocks from the biggest names in tech, including Apple, Microsoft, Nvidia, and more. So far this year, MAGS has surged 44.5%. However, it’s noteworthy that its performance in the last month—up just 2.4%—lags behind the financial sector’s robust 4.6% gain.

Notably, Tesla reported strong third-quarter earnings recently, which has pushed its stock up, providing a boost to MAGS even amid a general slowdown in other tech giants.

Avoiding Big Tech? Defiance’s New Offering

If the prevailing wisdom suggests a more cautious approach towards Big Tech, Defiance has launched the Defiance Large Cap Ex-Magnificent Seven ETF (XMAG). This fund offers exposure to the S&P 500 while excluding the biggest tech names, providing a solid option for those looking to diversify away from the tech giants.

Interestingly, while Amazon and Nvidia have seen gains in October, many of the other Magnificent Seven stocks are in the red. It’s clear that the bull run isn’t uniformly felt across the tech landscape, making this an essential moment for discerning investors.

Capitalizing on the AI Trend

For those optimistic about the artificial intelligence theme, BlackRock offers the iShares AI Innovation and Tech Active ETF (BAI), set to offer targeted investments in AI innovations. Additionally, the iShares Technology Opportunities Active ETF (TEK) is also worth monitoring, aiming to capture tech growth more opportunistically.

Not all ETF categories are thriving right now. According to Aniket Ullal from CFRA Research, the AI ETF space has seen decreased inflows over the past few months after an explosive start to 2024. Despite this, there are still standout funds like the Global X Robotics & Artificial Intelligence ETF (BOTZ) and others that are still managing to attract attention and assets.

A Snapshot of Performance

As of late October 2024, some of the best-performing AI-themed ETFs include:

• Roundhill Generative AI & Technology ETF (CHAT): Up 24.4% this year.
• Franklin Intelligent Machines ETF (IQM): Gains of 24.6%.
• Global X Artificial Intelligence & Technology ETF (AIQ): Rising over 19.7%.

For context, the S&P 500 is up 21.8% year-to-date, and the Invesco QQQ Trust (QQQ) is up 20.2%. These numbers remind us that while tech stocks remain hot, diversification and targeted strategies are essential for navigating today’s market.

Final Thoughts

As the investing landscape continues to transform in light of AI’s emergence and the dynamics of Big Tech, it’s essential to remain agile. The newly launched ETFs from BlackRock and Defiance provide both opportunities to dive deep into the megacap giants’ momentum or strategically avoid their pitfalls. Keep your finger on the pulse, assess your risk tolerance, and adjust your trading strategy accordingly. Happy trading, trend-followers!