The "Magnificent Seven" tech stocks have dominated the stock market narrative over the last year, and it's easy to see why.
This group of elite tech stocks, which includes Microsoft, Apple (NASDAQ: AAPL), Nvidia (NASDAQ: NVDA), Amazon, Alphabet, Meta Platforms (NASDAQ: META), and Tesla (NASDAQ: TSLA), returned more than 100% in 2023, and it's off to a good start in 2024, up 17% on average through March 21.
However, the Magnificent Seven might not be as magnificent going forward. First, the group of tech stocks has already attracted a lot of attention on Wall Street and among retail investors, arguably lifting valuations beyond where they should be. Second, some members of the group don't look as solid as they once did.
Tesla stock, for example, is down 30% this year as electric vehicle sales growth is plateauing, prices in the industry have come down, and the company's production growth is slowing. Apple has also been a stock market loser this year as the iPhone maker has faced headwinds in China, its revenue growth is flatlining, and the Department of Justice just sued Apple, claiming it has a monopoly.
Meanwhile, even the Magnificent Seven's top performers like Nvidia and Meta Platforms are likely to slow down as much of their future growth is already baked into their current stock prices.
Nvidia has been the leader of the artificial intelligence (AI) boom, but with its market cap already at $2.3 billion, it would be difficult for the stock to post eye-popping gains from here. Similarly, Meta Platforms has also been a big winner, but much of the surge in profits that came from its cost-cutting has already taken place and won't be repeated.
In other words, it looks like the best days of the Magnificent Seven are behind it. If you're looking to move beyond the Magnificent Seven, there's one Vanguard exchange-traded fund (ETF) that looks like a perfect match for investors looking for growth potential in a new bull market. That's the Vanguard U.S. Momentum Factor ETF (VFMO 1.04%). Here's why it looks like a winner.
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A better momentum play
The Vanguard U.S. Momentum Factor ETF is an actively managed ETF that invests in stocks with the potential to generate higher returns and stocks with a strong recent performance as measured by their performance at multiple intervals over the last year.
The fund chooses from the 3,000 largest stocks, represented by the Russell 3000, and, unlike the Magnificent Seven, the Vanguard Momentum ETF is diversified across multiple sectors with 29% of the fund in technology, 19% in industrials, 17% in consumer discretionary, and 15% in healthcare, with the remainder spread across the stock market.
The Vanguard Momentum ETF's top two holdings are actually Meta Platforms and Nvidia, but they make up less than 4% of the fund's total value. The rest of the top five includes General Electric, Arista Networks, and Broadcom.
The VFMO ETF has 574 stocks, showing that it's well diversified, and the ETF is growing faster and is cheaper than the benchmark Russell 3000. Over the last five years, the portfolio stocks have grown 19.2% and the fund has a price-to-earnings ratio of 21.3, making it cheaper than the S&P 500.
The fund has also performed well so far this year, up 15.4%, just shy of the average of the Magnificent Seven, though that is distorted by the success of Nvidia, which is up 84% this year.
Momentum stocks tend to do well in bull markets as investors recognize them and jump on as they climb. That helps explain the soaring returns of stocks like Nvidia and Meta Platforms.
With a new bull market that could just be starting, finding a diversified growth stock fund makes sense, and the Vanguard Momentum ETF is just that. Look for the VRMO ETF to continue to outperform the S&P 500 no matter what happens moving forward.