Ways to target - or avoid - Big Tech and megacap stocks via ETFs amid AI frenzy

MW Ways to target - or avoid - Big Tech and megacap stocks via ETFs amid AI frenzy

By Christine Idzelis

Some Big Tech stocks are in the red so far in October

Hello! In this week's ETF Wrap, we look at ways investors may manage their Big Tech and megacap-stock exposure, including via some new ETFs from BlackRock and Defiance.

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The massive rise in so-called Big Tech stocks has shown some signs of petering out over the past month, as investors manage their exposure to artificial intelligence and the giant companies influencing the ups and down of the market.

The biggest companies in the S&P 500 index have attracted a lot of investor attention for their exposure to AI, a hot theme in the U.S. stock market evidenced by AI chip giant Nvidia Corp.'s extraordinary gain of 183.5% so far this year. Nvidia belongs to a small group of Big Tech companies with massive market values resulting in heavy stock weightings in the S&P 500.

"The shape of the U.S. equity market has undergone a massive change over just the last few years," said Rachel Aguirre, U.S. head of iShares products at BlackRock, by phone. "We have the rise of Big Tech," and the increasing influence of megacap stocks more broadly, she said.

BlackRock on Thursday launched three ETFs designed to help investors "precisely target that megacap exposure" by increasing their allocation to such stocks - or steering away from that part of the market - as they adjust their portfolios, according to Aguirre.

The new funds are the iShares Top 20 U.S. Stocks ETF TOPT, iShares Nasdaq Top 30 Stocks ETF QTOP and iShares Nasdaq-100 ex Top 30 ETF QNXT.

The first fund tracks the 20 largest U.S. companies in the S&P 500, while the iShares Nasdaq Top 30 Stocks ETF provides exposure to the 30 biggest stocks in the Nasdaq-100 index. By contrast, the iShares Nasdaq-100 ex Top 30 ETF excludes the most heavily-weighted companies in that large-cap growth index.

"For those who believe those largest companies will continue to drive out outsized returns, then the top 30 is a way to get that targeted exposure," said Aguirre. "If you stand on the other side of that argument, if you believe that actually this rally is going to broaden out, then the next 70 may be an exposure that would be really interesting."

Aguirre said "UC Regents has chosen to be an early investor in the Nasdaq top 30 ETF," referring to the University of California Board of Regents. BlackRock's new exchange-traded fund is meant to appeal to a wide range of investors, including individuals and the financial advisors that manage their wealth, she said.

One way investors have been targeting their exposure to Big Tech stocks is through the Roundhill Magnificent Seven ETF MAGS, which holds Apple Inc. $(AAPL)$, Nvidia $(NVDA)$, Microsoft Corp. $(MSFT)$, Google parent Alphabet Inc. $(GOOGL)$, Amazon.com Inc. $(AMZN)$, Facebook parent Meta Platforms Inc. $(META)$ and Tesla Inc. $(TSLA)$. Tesla surged Thursday after the company reported its third-quarter earnings results, propelling the ETF to a sharp gain even as other Big Tech stocks in its portfolio slipped.

The Roundhill Magnificent Seven ETF, which provides equal-weight exposure to the stocks it holds, has soared 44.5% so far this year to widely beat all of the S&P 500's sectors. But over the past month, the fund's 2.4% rise trails the 4.6% gain for the S&P 500's financial stocks.

For investors who want to avoid Big Tech, Defiance said earlier this week it launched the Defiance Large Cap Ex-Magnificent Seven ETF XMAG, which provides exposure to the S&P 500 but excludes Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla.

Amazon and Nvidia are the only two stocks in Magnificent Seven with an October gain through Thursday, according to FactSet data. Amazon has edged up less than 0.1% this month through Thursday, while Nvidia has surged 15.6% in October. The other Big Tech stocks in the group are in the red so far this month.

AI theme

While investors can get exposure to artificial intelligence and technology stocks through traditional market-capitalization-weighted indexes, as well as via BlackRock's ETFs launched Thursday, some seek funds targeting AI as an investment theme, said Aguirre.

For example, BlackRock's Tony Kim, head of the asset manager's fundamental equities technology group, actively manages the iShares AI Innovation and Tech Active ETF BAI. The exchange-traded fund was listed on Oct. 22, alongside another new actively managed fund, the iShares Technology Opportunities Active ETF TEK, also led by Kim.

Most of the money flowing this year into AI-themed ETFs came during the first half of 2024, according to Aniket Ullal, head of ETF research and analytics at CFRA Research. The category has seen outflows in the past three months through Monday, he said in a phone interview.

The biggest ETFs in the AI category tracked by CFRA are the Global X Robotics & Artificial Intelligence ETF BOTZ, Global X Artificial Intelligence & Technology ETF AIQ and SPDR S&P Kensho New Economies Composite ETF KOMP, according to Ullal.

The Global X Robotics & Artificial Intelligence ETF has around $2.5 billion of assets, while the other two funds each have around $2 billion, according to FactSet data.

The best-performing ETFs in the AI category this year through Monday included the Roundhill Generative AI & Technology ETF CHAT, Franklin Intelligent Machines ETF IQM, and Global X Artificial Intelligence & Technology ETF, said Ullal, adding that excludes leveraged funds.

The Roundhill Generative AI & Technology ETF's five biggest holdings as of Oct. 23 included Big Tech stocks Nvidia, Alphabet, Microsoft and Meta as well as Marvell Technology Inc. $(MRVL)$, according to data on Roundhill's website. The fund is up 24.4% this year through Thursday.

The Franklin Intelligent Machines ETF has climbed 24.6% in 2024, while the Global X Artificial Intelligence & Technology ETF has risen more than 19.7% this year through Thursday, according to FactSet data.

By way of comparison, the S&P 500 SPX, a widely followed benchmark for U.S. large-cap stocks, has jumped 21.8% so far in 2024. And the Invesco QQQ Trust Series I QQQ, which tracks the Nasdaq-100 index, has gained 20.2% this year through Thursday.

ETFs that track broad benchmarks tend to be less expensive than thematic and actively managed funds, said Ullal.

The top 10 holdings of the SPDR S&P 500 ETF Trust SPY, which tracks the S&P 500 index, included Apple, Nvidia, Microsoft, Amazon, Meta, Alphabet, Berkshire Hathaway Inc. $(BRK.B)$, Broadcom Inc. $(AVGO)$ and Eli Lilly & Co. $(LLY)$ as of Oct. 23, according to data on the website of State Street Global Advisors.

As usual, here's your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good....

   Top performers                                                                                                                                                                       %Performance 
   Global X Silver Miners ETF                                                                                                                                                           9.8 
   AdvisorShares Pure US Cannabis ETF                                                                                                                                                   9.6 
   YieldMax MSTR Option Income Strategy ETF                                                                                                                                             9.5 
   Amplify Junior Silver Miners ETF                                                                                                                                                     8.8 
   iShares Silver Trust                                                                                                                                                                 6.3 
   Source: FactSet data through Wednesday, Oct. 23. Start date Oct. 17. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater. 

...the bad

   Bottom Performers                    %Performance 
   iShares U.S. Home Construction ETF   -5.9 
   SPDR S&P Homebuilders ETF            -5.2 
   iShares MSCI Japan ETF               -4.4 
   Franklin FTSE Japan ETF              -4.4 
   JPMorgan BetaBuilders Japan ETF      -4.4 
   Source: FactSet data 

New ETFs

-- Amplify ETFs announced Oct. 23 that it launched the actively managed Amplify Small-Mid Cap Equity ETF SMAP to provide investors exposure to high-quality growth and value stocks that are listed in the U.S. and fall within the small- and mid-cap category.

-- Tuttle Capital Management said Oct. 22 that it listed the Select STOXX Europe Aerospace & Defense ETF EUAD, a fund designed to invest in shares of Europe-based companies that are linked to the aerospace industry or civil and military defense efforts.

Weekly ETF reads

-- The Russell 2000 is flawed - this ETF plays it in a better way for quality (MarketWatch)

-- Investors flee thematic ETFs as stock benchmarks soar (Reuters)

-- NYSE, Cboe Win SEC Approval for Bitcoin ETF Options (CoinDesk)

-- BlackRock's ETF chief says 75% of its bitcoin buyers are crypto fans new to Wall Street (CNBC)

-- Japan maintains cautious stance on crypto ETFs (Financial Times)

-- Risky-ETF Crew Grabs Wall Street Limelight With Long-Short Bets (Bloomberg)

-- KKM Financial's Essential 40 stock fund is now an ETF (CNBC)

-Christine Idzelis

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October 24, 2024 18:48 ET (22:48 GMT)

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