MAGS: Makes Little Sense

seekingalpha08-30

tadamichi Introduction I recently analyzed the Vanguard Mega Cap Growth Index Fund (MGK) as part of a deeper analysis of large-cap stocks that seem to garner some investor pushback due to growth and ...

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href=https://seekingalpha.com/article/4718087-mags-makes-little-sense><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>tadamichi Introduction I recently analyzed the Vanguard Mega Cap Growth Index Fund (MGK) as part of a deeper analysis of large-cap stocks that seem to garner some investor pushback due to growth and ...</p>\n\n<a href=\"https://seekingalpha.com/article/4718087-mags-makes-little-sense\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4141","symbol_name":"半导体产品","start_time":0,"source_url":"https://seekingalpha.com/article/4718087-mags-makes-little-sense","article_id":"2463006692","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1453953453/image_1453953453.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2463006692","pubTimestamp":1725007887,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"tadamichi Introduction I recently analyzed the Vanguard Mega Cap Growth Index Fund (MGK) as part of a deeper analysis of large-cap stocks that seem to garner some investor pushback due to growth and v","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4141":"半导体产品","LU1852331112.SGD":"Blackrock World Technology Fund A2 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Now I dive further into the mega-cap space with a view on the Roundhill Magnificent Seven ETF (NASDAQ:MAGS), launched in April 2023, which as the name indicates is a very concentrated ETF of the world's top tech names. If you are wondering, what value can an ETF with 7 stocks have, apart from perhaps a short-term trading basket, I wonder along with you. Performance Back Testing Given its short life, I did not think it worthwhile to compare MAGS per se, but rather back test the portfolio from Meta's IPO in May 2012. The results, as illustrated in the charts below, highlight how Tesla's (TSLA) outsized gains in 2020-2022 greatly impacted a Mag-7 basket. This is highly unlikely to repeat, with Tesla now one of the main drags. On the positive side, the MAGS ex-Tesla handsomely beat the Nasdaq (NDX) which demonstrates the power of portfolio concentration. Created by author with data from Capital IQCreated by author with data from Capital IQ Investment Strategy & Nuances The fund has two primary characteristics that investors should be aware of. First, the goal is to maintain equal weights in the 7 stocks and will rebalance every quarter. Thus, any outsized gains/losses from one stock will not be reflected in full-year results. The second item, that may cause some confusion, is the use of swaps to gain exposure to the 7 stocks. Swaps, as explained below in the ETF prospectus, are essentially contracts with a broker/bank where the ETF pays a fee or interest rate to a third party that has acquired the stocks on its behalf. This means the ETF should gain or lose whatever the stocks performed during the length of the contract less the swap cost. The 59% of AUM in US Treasuries should offset the fee/interest cost of the swap, I doubt the ETF can generate a positive carry or “yield”. This would mean the broker/bank earns less than the short-term treasury, i.e. risk-free. This swap mechanism adds undue complexity and higher risk, since the US treasury portfolio may be exposed to declining rate risk. Roundhill  Rounhill Portfolio Upside I gathered consensus price targets for the 7 stocks, which I equally weighted given the strategy of the ETF. This results in a 13% potential upside over the next 12 months, which, as can be seen in the table below, is dragged down by a weak 3% potential from Apple (AAPL) and a -2% at Tesla. The consensus is far more positive to Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOG) with over 20% potential gains.   Created by author with data from Capital IQ Growth & Valuation I also calculated the ETF's growth and valuation metrics based on consensus estimates. The portfolio should see revenue growth of 24% in what's left of 2024, driven by Nvidia (NVDA) which then begins to normalize at 16% in 2025. Margins are estimated to expand, mainly due to Tesla's recuperation that helps grow EPS by over 20% in the YE25-26 period. Despite the size of the companies, the market believes they can continue to grow above the market. This portfolio is valued at 32x PE on 2025 EPS, which comes to a 1.6x PEG that is in line with the NDX. The most expensive stock is Apple at 2.2x, while several trades below market levels. Despite the headline PE, the MAG-7 is not expensive relative to earnings growth. Created by author with data from Capital IQ  Created by author with data from Capital IQ Risk The ETF has significant concentration risk, with 7 stocks equally weighted, the potential for underperformance is high if just one of the companies falls out of favor, sees weak growth, comes under regulatory scrutiny, etc. The MAG-7 are extremely large and dominant companies with antitrust issues. While the massive capex in hyperscaler infrastructure to reap benefits from AI implementation may draw more regulatory scrutiny. Conclusion  I rate MAGS a sell. While I'm not for or against owning any one of the MAG-7, I fail to see the rationale of paying fees to buy and hold them or being forced into equal-weight rebalancing every quarter. The swap exposure mechanism adds more complexity and fees, as does holding US treasuries in a declining rate environment. At best this ETF can be used as a short-term trading basket, in my view.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2463006692"}