Over the past year, many of the Magnificent Seven stocks have lost some of their previous momentum.
The Magnificent Seven stocks represent leading tech companies, each valued at over $1 trillion currently. This group includes Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. They’ve collectively generated substantial profits over the last decade. Interestingly, while Meta Platforms leads the group with a ten-year return around 540%, it’s worth noting that the S&P 500 has gained approximately 265% during the same timeframe.
However, the last twelve months have unfolded quite differently. The S&P 500 has outperformed all but two of the Magnificent Seven—those exceptions being Alphabet and Nvidia. Investors are becoming increasingly worried about high market valuations lately, and the trends among these tech giants may be reflective of those worries.
So, is investing in the Magnificent Seven still a smart move, or should attention shift to smaller-cap stocks this year instead?
Advantages of the Magnificent Seven
These stocks consist of robust companies with solid financials. While high valuations can make them vulnerable to market corrections, these firms are capable of adapting to shifting market conditions. Unlike smaller stocks, they have the financial resources to pivot quickly.
Moreover, it’s easy to invest in all these stocks without having to buy each one individually. For instance, the Round Hill Magnificent Seven ETF could be an option. I’ve personally invested in it, and it boasts a reasonable expense ratio of 0.29%. Over the last year, this fund has seen about a 15% increase.
With smaller-cap stocks, there’s a higher level of risk, paired with the expectation of significant gains. They usually need cash injections to thrive—especially during periods of low interest rates. But with the prospect of interest rate cuts looking slim this year, 2026 might not be the ideal time for holding onto these stocks. That’s where the Round Hill Magnificent Seven ETF becomes an appealing choice right now. Still, I wouldn’t say that opting for smaller-cap stocks is a poor decision.
A Wise Approach to Invest in Small-Cap Stocks
Selecting individual small-cap stocks can be quite risky, but the iShares Russell 2000 ETF offers a way to mitigate that risk through diversification. This fund encompasses nearly 2,000 stocks, with its largest holdings only making up about 1% of its overall investment.
If some stocks in the fund falter, investors might still find themselves relatively safe due to minimal exposure to single stocks. Additionally, the iShares fund has a low expense ratio of 0.19%, which is even better compared to the Round Hill fund, while still providing considerable diversification. In the past year, this ETF has appreciated by 17%.
Investing in iShares funds might provide a blend of reduced risk and opportunities to capitalize on the growth of smaller-cap stocks. In 2022, when the S&P 500 dropped 19%, the iShares Russell 2000 ETF saw a slightly steeper decline at 22%. Conversely, all of the Magnificent Seven stocks faced losses, with Apple showing the best performance amid a 27% drop.
Ironically, the iShares Russell 2000 ETF may end up being the safer long-term choice, which is why I’m inclined towards it this year. The rising valuations of the Magnificent Seven might leave the Round Hill Fund more exposed to a sharp downturn.
