Magnificent 7 Index: How to Trade Magnificent 7 stocks

Initially, the market spotlight was on FANG stocks, which evolved into FAANG and MATANA. In 2023, the focus shifted to the Magnificent 7 stocks, with each of these groupings serving as a quick reference to the leading stock market performers over the past 10 years.

In this article, we explore the Magnificent 7 index, including its stock components and how to trade it.

Main Points:

• The market's focus has shifted from FANG, to FAANG and MATANA, and now to the Magnificent 7 stocks.
• The BITA US Magnificent 7 Index tracks the gross total return of seven leading US technology companies, offering exposure to traders and investors.
• The Magnificent 7 stocks delivered a 75% return in 2023, significantly outperforming the S&P 500.
• Investors can gain exposure to the Magnificent 7 index through share dealing, contracts for differences (CFDs), or exchange-traded funds (ETFs).

Introduction to the Magnificent 7 Stocks

Drawing from the iconic 1960 Hollywood film 'The Magnificent Seven', featuring a group of seven gunmen, the financial world adopted the term to represent a group of influential companies. This concept was adapted to the financial world in 2023 by Michael Hartnett, an Analyst at Bank of America (BAC), who used it to describe the seven high-performing and influential stocks on Wall Street, dubbing them the Magnificent Seven of the US stock market.

What Is the BITA Magnificent 7 Index?

The BITA US Magnificent 7 Index (BMAGSI) is a stock market benchmark that tracks the gross total return of the seven leading, high-performing technology companies in the United States. This index allows trading these market-dominant stocks collectively within a single position. It was created on 9 January 2024 at an inception value of 984.55 USD.

Characteristics of the Magnificent 7 index

• The Magnificent 7 index constituents are all listed on the NASDAQ stock exchange.
• The index's equities are assigned weights proportional to their free-float market capitalisation.
• The composition of the index is reviewed and rebalanced on a quarterly basis.
• The index values are published on an intraday and end-of-day basis.
• While the index is tech-focused, it provides exposure to various sectors.
• The index constituents are widely regarded as industry leaders.

What Are the Magnificent 7 Stocks?

The Magnificent Seven stocks span the following sectors: Internet software/services, telecommunications, internet retail, software, semiconductors, and electric vehicles.

The Magnificent Seven stocks are historically resilient and capable of withstanding an economic recession over long-term periods. While these are our projections, it's important to remember that markets are unpredictable.

The table below reveals the magnificent 7 stocks by sector and market capitalisation as of September 2024

Performance of the Magnificent 7 index

Historically, the Magnificent Seven have exhibited significantly higher price fluctuations than the broader market. Their valuations, measured by price-to-earnings ratios, have consistently surpassed the S&P 500 and Nasdaq 100, raising concerns about potential overvaluation.

Despite lofty valuations, the Magnificent Seven delivered returns of 75% in 2023, far outpacing the S&P 500 return of 24.2%. The 'seven' also have a dominant role within the S&P 500, accounting for more than 30% of the S&P 500 total market capitalisation in 2024.

Below is a summary of the performance for each Magnificent 7 stock as of September 2024:

This table clearly illustrates Nvidia's significant outperformance compared to the rest of the group. Meta Platforms also showed strong growth while the remaining companies have moderately increased.

Pros of the Magnificent 7 Stocks

Here are traits common among the Magnificent Seven stocks:

• These stocks have navigated economic tides, from consumer trends to technological disruptions.
• They have good earnings, revenue growth, and healthy balance sheets.
• They operate across borders and benefit from diverse and international markets.
• They are positioned within their respective industries as market leaders.
• They have well-established brands and loyal customer bases.

Cons of the Magnificent 7 Stocks

• Regulatory Risks: The seven tech titans are constantly under the radar of regulators and are influenced by policy shifts in areas like data privacy and international trade.
• Macroeconomic Pressures: The value of the index is susceptible to factors like economic crises, monetary policies, inflation, and consumer sentiment (CCI).
• Currency Fluctuations: Exchange rate volatility poses a risk to the earnings and valuation of the constituent stocks, potentially affecting index price movement.
• Geopolitical Risks: Trade disputes and shifting diplomatic relations can disrupt their global supply chains, affecting the Magnificent 7 valuation.
• Market Challenges: As they reach maturity, these companies may struggle to discover new growth opportunities.
• Competition: Magnificent 7 stocks face intensified competition from established rivals, and stunted growth could lead to obsolescence and replacement in the index.

How to Trade Magnificent 7 Index

For traders and investors interested in gaining exposure to the price movements of the Magnificent 7 Index, there are several avenues to consider:

1. Share Dealing: This traditional method involves buying and holding individual shares within the Magnificent 7 Index. Investors can profit from stock price appreciation or dividends. However, not all companies in the Magnificent 7 pay dividends.
2. Contracts for Difference (CFDs): Traders can actively speculate on the price movements of the BITA US Magnificent 7 index through index CFDs on the Plus500 trading platform. With CFDs, you collectively gain exposure to the price movement of 7 stocks without owning any underlying shares. This allows traders to open long or short positions depending on their market outlook. While CFDs offer the potential for profits, they also carry a high risk of significant losses, especially when leverage is involved.
3. Exchange-Traded Funds (ETFs): Trading or investing in Magnificent 7 stock ETFs, such as the Roundhill Magnificent Seven ETF, allows investors to gain diversified exposure to the seven leading tech giants, thus reducing the risk and complexities associated with holding individual stocks.

Trading Hours for Magnificent 7 Index CFDs

The BITA Magnificent 7 index offers 24/7 availability for traders to gain exposure to its price movement. On the Plus500 platform, Magnificent 7 index CFD trading* is available from Monday to Friday 15:30 PM CET - 22:00 PM CET.

*Please note that trading platform hours may vary depending on the individual operator.

Steps to Buy and Sell Magnificent 7 Index CFDs

To trade Magnificent 7 Index CFDs with Plus500, follow these steps, among others:

• Create a trading account with Plus500.
• Access the trading platform and its advanced trading tools.
• Search for the "Magnificent 7 Index" or browse the available contracts.
• Analyse the index price movement using tools such as technical and fundamental analysis, among other tools.
• Specify the amount of contracts you wish to buy or sell.
• Establish your risk management parameters, including (but not limited to) stop-loss and take-profit levels.
• Confirm your buy or sell position.

Conclusion

The Magnificent Seven Index represents a unique intersection of technological innovation and market dominance, comprising industry leaders in sectors such as artificial intelligence, electric vehicles, cloud computing, and digital services.

Yet, investors must approach this index with a balanced perspective due to susceptibility to market volatility, regulatory changes, technological disruptions, and global economic conditions among other factors. Therefore, a nuanced understanding of these and other factors is essential for more informed trading decisions.

If you want to trade the Magnificent 7 Index, you can start trading Magnificent 7 Index CFDs with Plus500.