ETFs
The ETFs That Gained on Mag 7’s Worst Day in a Year
Big tech companies took a beating Thursday with indicators like NVIDIA NVDA fell more than 5%, while the entire group of stocks in the “Magnificent 7,” which includes Apple, Microsoft, Alphabet, Meta, Amazon, NVIDIA and Tesla, had their worst day in nearly a year, according to Yahoo Finance. The tech-heavy Nasdaq Composite fell nearly 2%.
You’re here TSLA shares snapped an 11-day rally to fall more than 8%, their worst day since January, after a Bloomberg report revealed that electric vehicle maker Tesla may delay the launch of its “robotaxi.” Roundhill Magnificent Seven ETF MAGS was down 4.5% on July 11.
Consumer inflation is falling
At the same time, the consumer price index (CPI) fell 0.1% in June and rose only 3.0% year-on-year. This annual increase marked the slowest increase in consumer prices since the start of 2021. U.S. inflation actually slowed for the third consecutive month.
That has sparked speculation that the Fed could cut rates sooner than expected. This week, Federal Reserve Chairman Jerome Powell indicated that favorable economic conditions could help the Fed begin implementing interest rate cuts. Inflation data released Thursday reinforced bets on a rate cut by September, with about 90% of traders expecting such an outcome, according to CME FedWatch.
Rate-sensitive sector ETFs benefit from the fall of the “Mag 7”
As the odds of rate cuts grew, investors began betting big on rate-sensitive sectors like real estate, which can be described as Vanguard Real Estate Index Fund Shares VNQ and Utilities, as reproduced by SPDR Fund for the Utilities Sector XLU, after lower-than-expected inflation in June. VNQ and XLU both rose 2.8% and 1.7% respectively on July 11. Real estate ETFs like iShares U.S. Residential Construction Exchange Traded Fund ITB also jumped up to 6.3% on the day.
Investors should note that these sectors are interest rate sensitive and perform better in a falling rate environment. In addition, these sectors are known to offer attractive yields, which is a key requirement in a low rate environment.
Dow Jones: a potentially winning index?
Investors should note that if the Fed cuts rates soon, the yield curve could steepen. With banks looking to borrow money at short-term rates and lend at long-term rates, a steepening yield curve yields more on loans and less on deposits, leading to a wider spread. This widens net margins and boosts bank profits (read: How Will Bank ETFs Perform in Light of Q2 Earnings?).
The Dow is now about 23% exposed to financials and should therefore perform better going forward. In addition, the Dow is 13.70% exposed to industrials, another sector that should benefit from low rates. SPDR Dow Jones Industrial Average Exchange Traded Fund (DIA) added 0.09% on July 11.
The story continues
What future for Magnificent 7?
While Magnificent 7 suffered a lot on Thursday, we expect the segment to recover in the coming days as a low-rate environment is also beneficial for high-growth tech stocks. While there is some debate over whether NVIDIA is an overvalued stock after posting 164% gains this year and trailing 12-month P/E of 74.95X (vs. the semiconductor industry’s P/E of 26.53X), not all members of Mag 7 are overvalued. They could have a meteoric run on the back of their AI initiatives.
And we all know that the AI boom is here to stay. Therefore, investors who have the heart to take risks can buy the Mag 7 dip with Mag 7-heavy ETFs like MAGS And Invesco ETF S&P 500 Top 50 XLG.
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NVIDIA Corporation (NVDA): Free Stock Analysis Report
Tesla, Inc. (TSLA): Free Stock Analysis Report
Vanguard Real Estate ETF (VNQ): ETF Research Reports
iShares US Home Construction ETF (ITB): ETF Research Reports
ETF SPDR Select Sector Utilities (XLU): ETF Research Reports
Invesco S&P 500 Top 50 ETF (XLG): ETF Research Reports
Roundhill Magnificent Seven ETF (MAGS): ETF Research Reports