The giant tech stocks that constitute the Magnificent Seven are making index funds, passive investors’ favorite safe investing tool, riskier.
While not as high as previous stellar years, the S&P 500, which tracks the broader market, still recorded a double-digit gain last year of 16.39%, several percentage points higher than the index’s 10% average annual return, not accounting for inflation, according to now-retired senior index analyst for S&P Dow Jones Indices, Howard Silverblatt.
But underneath the surface, the market’s respectable growth has been fueled by just a handful of companies, including several that make up the so-called Magnificent Seven, a group of high-performing, tech-related companies that have driven a large amount of stock market growth over the past several years. This large concentration in the broader market is bad news for index funds, which have for decades attracted passive investors for being among the safest bets in investing, but are now looking riskier than they have in years past.
In other words, when a few megacap stocks do all the heavy lifting, index funds lose their value as a diversified cushion, instead rising and falling based on Big Tech’s fortunes.
