An ETF Provider Aims to Reduce Magnificent 7 Exposure for Investors

The impressive gains made by Big Tech companies in recent years could be influencing the composition of your investment portfolio, particularly if you're aiming for diversification. John Davi, CEO of Astoria Portfolio Advisors, has raised concerns about the heavy concentration of the S&P 500 index in a handful of technology giants, commonly known as the "Magnificent Seven." These include Apple, Microsoft, Nvidia, Amazon, Meta Platforms, Alphabet, and Tesla.

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According to Davi, the dominance of these stocks within the S&P 500 presents a risk for investors seeking a well-balanced portfolio. Speaking to CNBC’s “ETF Edge” this week, he emphasized, “Those Mag Seven stocks are very expensive right now. You should rotate your portfolio and look beyond the ‘Mag Seven’ stocks.” His advice highlights the potential vulnerability of portfolios that are overly reliant on these high-growth tech firms, particularly if market conditions shift unfavorably for the sector.

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To address this issue, Davi suggests a different approach for long-term investors. His firm has developed the Astoria US Equity Weight Quality Kings ETF (ROE), designed to reduce the risks associated with heavy concentration in a few stocks. The ETF focuses on 100 of the highest quality large- and mid-cap U.S. stocks, aiming to minimize the concentration risks tied to traditional market-cap-weighted indices like the S&P 500.

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“Our marginal contribution to risk and return is a lot higher,” Davi explained, suggesting that the fund offers a better risk-adjusted return profile compared to indexes dominated by Big Tech. By spreading investments more evenly across a broader range of companies, the Astoria ETF aims to provide more stability, especially during periods of market volatility when tech stocks might underperform.

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As of January 31, data from FactSet reveals that the top 10 holdings in the S&P 500—primarily Big Tech companies—account for approximately 36% of the index’s total weight. This concentration means that the performance of the entire index is heavily influenced by just a handful of companies. If these giants experience significant declines, it can drag down the broader market, affecting diversified investors who rely on the S&P 500 for balanced exposure.

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In contrast, the Astoria US Equity Weight Quality Kings ETF adopts an equal-weight strategy, where each stock holds roughly 1% of the fund’s total assets. This approach helps mitigate the risk of overexposure to any single company. Since its launch on July 31, 2023, the fund has delivered strong performance, rising over 26%. While this is slightly below the S&P 500’s 32% gain during the same period, the ETF’s diversified structure provides a cushion against sharp declines in any one sector, particularly Big Tech.

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For investors interested in additional diversification strategies beyond Astoria’s offering, Todd Rosenbluth, head of research at VettaFi, points to several other exchange-traded funds (ETFs) that focus on quality growth and risk management. “If you wanted a more quality growth or quality filter on the S&P 500, Invesco offers the S&P 500 Quality ETF (SPHQ),” Rosenbluth noted. This ETF emphasizes companies with strong balance sheets, stable earnings, and consistent growth metrics, providing an alternative for those concerned about the high valuations of the Magnificent Seven.

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Rosenbluth also highlighted another option: the American Century Quality Growth ETF (QGRO). “This is an ETF that’s going to filter based on quality and growth characteristics and a few other factors,” he said. QGRO aims to identify companies with sustainable growth potential while applying rigorous quality filters to minimize exposure to weaker performers. Both SPHQ and QGRO are designed to help investors achieve a diversified equity portfolio without being overly reliant on a small group of tech giants.

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The growing popularity of equal-weight and quality-focused ETFs reflects a broader shift among investors who are increasingly wary of market concentration risks. While the Magnificent Seven have delivered remarkable returns in recent years, their outsized influence on major indices raises questions about long-term sustainability. Economic shifts, regulatory changes, or unexpected disruptions in the tech sector could significantly impact these companies, making diversification strategies more critical than ever.

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Moreover, as interest rates fluctuate and macroeconomic conditions evolve, the performance gap between growth-oriented tech stocks and other sectors may narrow. This environment could favor diversified portfolios that include high-quality companies from industries like healthcare, consumer goods, and financial services—areas often underrepresented in tech-heavy indices like the S&P 500.

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In conclusion, while Big Tech’s dominance has been a key driver of market gains, it also presents potential risks for investors who rely heavily on traditional market-cap-weighted indices. Experts like John Davi and Todd Rosenbluth suggest that now may be the time to reassess portfolio strategies, considering options like the Astoria US Equity Weight Quality Kings ETF, Invesco’s SPHQ, and American Century’s QGRO. These funds offer diversified exposure, reduce concentration risks, and position investors to navigate an increasingly complex market landscape.

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