Round Hill Magnificent Seven ETF (NASDAQ:MAGS) It will rise about 65% in 2024, nearly three times the gain of the S&P 500 index. (SNPINDEX: ^GSPC). As the name of this exchange-traded fund suggests, the company only holds seven stocks: Nvidia, Metaplatform, Alphabet, Amazon.com, Microsoft, Apple, and Tesla, all of which are large-scale companies. It is a growing company. If you have a value bias or are simply concerned about the fact that the market is being driven higher by such a small group of companies, then the Vanguard Mega Cap Value ETF is for you. (MGV -0.21%) In 2025, there may be a solution.
2024 was a strange market with a few big winners.
Looking at the S&P 500 index’s roughly 23% gain in 2024, this seems like an exceptional year for the market as a whole. But it may not be as good as you think. The evidence comes from the Invesco S&P 500 Equal Weight ETF. (NYSEMKT: RSP). This exchange-traded fund owns the same stocks in the S&P 500 index, but as its name suggests, it uses an equal-weighting approach rather than weighting stocks by market capitalization. The difference is the material.
SPY data by YCharts.
As the chart above highlights, the Invesco S&P 500 Equal Weight ETF is up about 10% in 2024. It wasn’t a bad year by any means, but it lagged far behind the market-cap weighted version of the same basic portfolio. Add in the roughly 65% rise in just seven mega-cap stocks tracked by the Round Hill Magnificent Seven ETF, and it becomes pretty clear where the differences are. That’s a problem, especially when you look at current metrics.
The S&P 500 index has a price-to-earnings ratio (P/E) of approximately 24 times. Round Hill Magnificent Seven ETF’s average P/E ratio is around 32x. To be fair, a P/E ratio of 32x isn’t mind-bogglingly high, but it’s still about 33% above the market average. If you value value at all, you should probably avoid Magnificent Seven stocks or even the S&P 500 index. Fortunately, there are other options if you still want to own megacap stocks.
Image source: Getty Images.
Vanguard Mega Cap Value ETF can help.
From a top-level perspective, the Vanguard Mega Cap Value ETF has an average P/E ratio of approximately 21x. This is below the average for the broader S&P 500 index and well below the average for the Magnificent Seven. Some hardcore value investors might argue that a P/E over 20 isn’t really value territory, but the point here is that the Vanguard Mega Cap Value ETF This is the pool from which we are procuring. This is not an actively managed ETF, so you’ll need to fill your portfolio even if the overall market goes up a bit.
The starting point is simply the largest companies in the market. From there, we use a multi-factor valuation model that looks at price-to-book ratio, forward P/E, historical P/E, price-to-dividend ratio, and price-to-sales ratio. Companies with the best overall scores are registered in the index, and currently 136 stocks are registered. Note that none of the Magnificent Seven is included in the ETF’s list of top holdings. On the other hand, the ETF’s expense ratio is only 0.07%.
SPY data by YCharts.
As the chart above shows, the Vanguard Mega Cap Value ETF performed similarly to an equal weighted version of the S&P 500 index in 2024. When you actually start investing, you find that you are buying funds that are late to the market. Best performing stocks on the market. However, that is actually the point of purchase. If you’re worried that the Magnificent Seven is reaching unsustainable heights, the Vanguard Mega Cap Value ETF minimizes your exposure to the most expensive stocks in its size category. This is an off-ramp that allows you to continue investing in large companies while keeping your investment low.
the market is fickle
Wall Street tends to oscillate between extremes, and the Magnificent Seven is currently highlighting the extremes with a focus on large-cap growth stocks. At some point, it’s very likely that investors will lose interest in this very small group of companies and move toward a more value-oriented focus. As 2025 begins, adding the Vanguard Mega Cap Value ETF to your portfolio can help you prepare for a transition that could lead to a deep downturn in the Magnificent Seven.
Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Reuben Greg Brewer has no position in any stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Microsoft, and Nvidia. The Motley Fool recommends the following options: A long January 2026 $395 call on Microsoft and a short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
