The "Magnificent Seven" stocks have been the darlings of Wall Street given their strong performances over the past couple of years. The group is made up of leading technology growth stocks that have helped power the market's bull run. The stocks in this exclusive club include chip giant Nvidia, iPhone maker Apple, search leader Alphabet, social media powerhouse Meta Platforms, electric vehicle maker Tesla, e-commerce juggernaut Amazon, and tech titan Microsoft.
Given their recent market leadership, investing in this group of stocks is tempting. However, before buying each of them individually, there is another alternative to consider: investing in the Invesco QQQ Trust ETF (QQQ -0.19%).
Why the Invesco QQQ ETF is a great alternative to the Magnificent Seven
The Invesco QQQ ETF is a passively managed exchange-traded fund (ETF) that tracks the performance of the Nasdaq-100 index. The index is weighted heavily toward tech stocks, with nearly 60% of its holdings in the sector. Another 18% of its holdings are in the consumer discretionary space, although many of these names are tech-oriented as well. For example, Amazon, Tesla, Netflix, and Booking Holdings are included in this segment.
The Magnificent Seven, meanwhile, are heavily represented in the ETF, with all seven stocks in its top 10 holdings. In fact, the group makes up 41% of the ETF's total portfolio. That right there gives investors a lot of exposure to this group of stocks.
However, the Invesco QQQ ETF adds a little extra diversity as well, which can be a good thing. The ETF is very much growth-oriented and gives investors exposure to companies leading the way in the areas of artificial intelligence (AI), cybersecurity, fintech, electric vehicles, and cloud computing.
The ETF also gives investors the opportunity to own the next big trending stocks as well. Before the Magnificent Seven there was FANG leading the way, which included Facebook (now Meta Platforms), Amazon, Netflix, and Google (now Alphabet); and then later FAANG, when Apple was added to the group. However, this shift shows that these leading tech stocks will change over time, and the Invesco QQQ ETF likely holds that next big tech winner among its holdings.
The great thing about the Nasdaq-100 index is that it is a market capitalization-weighted index that lets its winners run and its losers fall. Thus, the better a stock performs the larger a part of the index it becomes, while the worse it performs the smaller its position becomes. This goes against the natural instinct of many investors to sell their winners and add to their losers. However, there is often a good reason why winning stocks are performing well and climb to the heights they do.
Thus, investing in the Invesco QQQ ETF is going to let the best of the Magnificent Seven stocks rise to the top naturally and let any laggards slip out of the group naturally, with any potential replacement likely already lined up.
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Strong historical returns
The Invesco QQQ ETF has performed very well over the years. The index has an annual average return of 18.1% over the past 10 years, which easily surpasses the 12.4% return from the S&P 500 index over the same period. Over the past year, meanwhile, the ETF has risen 32.5%, outpacing the 22.7% return of the S&P. In fact, the ETF has outperformed the S&P 500 87% of the time over the past 10 years.
Given that we are in the early innings of a potential AI revolution, investing in growth-oriented tech stocks is a solid strategy. The Invesco QQQ ETF, meanwhile, is a great option for investors to consider. Investors don't have to worry about finding the big AI winners, as the index will naturally sort that out. It also gives investors some instant diversification with a tiny expense ratio of just 0.2%.
