The dominant “Magnificent Seven” stocks in the S&P 500 index may have some investors expecting that they’re “well exposed” to thematic growth in their portfolios, but that might not be the case, according to BlackRock.
“While they might think they have a lot, or a significant exposure, to a specific theme, they actually might have quite little,” said Jay Jacobs, U.S. head of thematics and active equity ETFs at BlackRock, in a phone interview. “People need to really intentionally allocate to them to get significant exposure.”
BlackRock analyzed a portfolio representative of U.S. wealth investors’ broad allocations to stocks, measuring its average weighting across different themes such as artificial intelligence, medical innovation and the “rewiring of globalization” that could benefit countries like Mexico and India, according to a new report from the giant asset manager.
“The results show low exposure to key themes, particularly when it comes to pure-play names, or companies that focus specifically on products or services related to a theme,” the firm found.
BlackRock said it found no theme in the chart has more than around 1.5% pure-play exposure, with the average being less than 1%.
“Only 1.5% of the average robotics and AI allocation is coming from firms with high sensitivity to the theme,” the report says. “The rest comes from U.S.-based, mega-cap firms in the technology and communication services sectors.”
Megacap stocks known as the “Magnificent Seven,” or Big Tech, fall across the information-technology, communication-services and consumer-discretionary sectors.
The group — which has posted outsize returns in the U.S. stock market in 2023 – includes Microsoft Corp.
Facebook parent Meta Platforms Inc.
Google parent Alphabet Inc.
and Tesla Inc.
“People are getting AI exposure, but it tends to be through the Magnificent Seven,” said Jacobs. “Maybe it’s because they’re so heavily weighted in the S&P 500, or they have a tech sector allocation.”
The iShares Semiconductor ETF
and the iShares Robotics and Artificial Intelligence Multisector ETF
are ways to invest in the AI theme, according to Jacobs.
“The next phase of growth for AI,” said Jacobs, is going to be “much more in the small and mid-cap space.”
He said the iShares Cybersecurity and Tech ETF
is also related to the AI theme.
“AI is really a game of data,” Jacobs said. “Cybersecurity is how you defend and ensure the integrity of that data.”
As for the rewiring of globalization, the iShares MSCI Mexico ETF
and iShares MSCI India ETF
are ways to invest in “the changing shape of our supply chains” and economic partnerships, according to Jacobs. “Mexico recently became the biggest trade partner of the United States, surpassing China and Canada,” he said.
Meanwhile, “you’ve started to see more tariff removal between the United States and India,” he said. India is “very appealing” from a demographics standpoint as it has a large, young population that’s significantly educated, particularly in tech, said Jacobs.
The BlackRock report says that U.S. demographics are at “an inflection point as we hit ‘peak 65’ – the largest number of people ever reaching traditional retirement age – and the ‘Historical Reversal’ – wherein the proportion of Americans aged 65 and older exceeds children under 15 for the first time.” As the U.S. population ages, more Americans will experience age-related diseases, said BlackRock, pointing to “a new era for medical innovation.”
Among the funds investing in the medical-innovation theme are the BlackRock Future Health ETF
iShares Biotechnology ETF
and iShares Neuroscience and Healthcare ETF
according to the report.
“Thematic strategies are built using a tailored construction process to best capture” each theme’s “value chain,” BlackRock said. “Owning a targeted basket of securities poised to benefit from the emergence of a theme can help investors capture thematic outperformance – even in a world where rates are higher for longer.”