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Big Tech, Magnificent 7 stock exposure: Time to reduce?

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Complimenting concentration risk

Big Tech’s historic gains could be affecting your portfolio’s makeup — especially if your goal is diversification.

Astoria Portfolio Advisors CEO John Davi warns the S&P 500 index tilts too far in favor of the so-called Magnificent Seven stocks: Apple, Microsoft, Nvidia, Amazon, Meta Platforms, Alphabet and Tesla.

“Those Mag Seven stocks are very expensive right now,” Davi said told CNBC’s “ETF Edge” this week. “You should rotate your portfolio, and rotate into other things beside ‘Mag Seven’ stocks.”

Davi thinks he has a product to help long-term investors. His firm is behind the Astoria US Equity Weight Quality Kings ETF (ROE). According to the Astoria website, it invests in 100 of the highest quality U.S. large and mid-cap stocks and avoids “concentration risks associated with market-cap weighting.”

“Our marginal contribution to risk and return is a lot higher,” said Davi.

As of Jan. 31, the top 10 stocks in the S&P 500 are mostly big tech. They accounted for about 36% of the index, according to FactSet.

In the Astoria US Equal Weight Quality Kings ETF, each stock is weighted around 1%, according to FactSet. Since the ETF’s launch on July 31, 2023, the fund is up more than 26%. Meanwhile, the S&P 500 is up 32% in the same period.

VettaFi’s Todd Rosenbluth highlighted ETF options beyond Astoria’s ETF for investors looking to diversify.

“If you wanted a more quality growth or quality filter on the S&P 500, Invesco has an S&P 500 quality ETF, SPHQ. If you wanted something that was more quality and growth and additional filters, American Century has an ETF. The ticker is QGRO. This is an ETF that’s going to filter based on quality and growth characteristics and a few other ones,” the firm’s head of research said. 

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TMUS, GOOGL, TSLA, INTC and more

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T. Rowe Price likes stock picking now

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One of the largest active ETF managers on leveraging fund tactics in new ways

It appears T. Rowe Price is benefitting from the record growth in actively managed exchange traded funds.

Tim Coyne, the firm’s head of ETFs, reports the firm is seeing significant growth in the area — listing the T. Rowe Price Capital Appreciation Equity ETF (TCAF) and T. Rowe Price U.S. Equity Research ETF (TSPA) as two established strategies that can satisfy investor demand.

“I think having that professionally managed portfolio is really beneficial to clients,” Coyne told CNBC’s “ETF Edge” this week. “We’re seeing just… greater volatility [and] uncertainty across both the equity and fixed income markets.

According to Coyne, the T. Rowe Price Capital Appreciation Equity ETF suits investors who are looking for long-term growth.

“The objective of the fund is to outperform the S&P 500 with lower volatility and greater tax efficiency,” he said. “It’s also a more concentrated portfolio, typically holding around a hundred names.”

As of April 24, the fund’s top holdings include Microsoft, Amazon, and Apple according to the T. Rowe Price website. But it’s not all Big Tech. The ETF also features smaller positions in companies like Becton Dickinson and Roper Technologies.

The T. Rowe Price Capital Appreciation Equity ETF is down about 5% so far this year while the S&P 500 is off about 7% However, the ETF is up close to 8% over the past year — roughly identical to the S&P 500’s performance.

Coyne notes the T. Rowe Price U.S. Equity Research ETF follows a similar strategy, but with a heavier weighting in top tech stocks.

“This is more of a large-cap growth product [T Rowe Price U.S. Equity Research ETF],” he said. “There are components of characteristics of both passive and active here. This fund is actually managed by our North American directors of research. So again, strong fundamental research is going into the stock selection.”

Both the T. Rowe Price U.S. Equity Research ETF and S&P 500 are down around 7% since the beginning of the year. Meanwhile, the fund is up almost 9% over the past year. That’s less than one percent better than the S&P 500’s performance.

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T. Rowe Price U.S. Equity Research ETF vs. S&P 500

‘Some form of bear market’

Strategas Securities’ Todd Sohn thinks investment demand for active managers will continue to be strong.

“This is the type of the environment where it [active management] can actually shine,” the firm’s senior ETF and technical strategist said. “We are in some form of bear market. This is where the active manager really can come into hand and offer their solution they are doing right.”

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