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ETFs: Magnificent 7 and AI gone from hype to 'growing pains'

Earnings season has garnered mixed stock results, especially for companies who have to compare to Wall Street's high expectations, so how successful have ETF plays for Magnificent Seven stocks and AI-adjacent companies been?

ETF Think Tank Director of Research Cinthia Murphy explains the benefits of "concentrating" on Magnificent Seven exposure in ETF portfolios at this moment, including the benefits of diversification into the robotics space. Murphy also discusses the initial breakthroughs in spot bitcoin ETF offerings.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video transcript

- Well, the NASDAQ down about 1.5% here, with tech shares continuing to come under pressure. This comes after Microsoft and Alphabet reported earnings both beat overall earnings estimates, but did not beat investors lofty outlook expectations it seems. Sending overall tech stocks lower for more on how you can diversify your portfolio with Mag Seven exposed ETFs. As part of our ETF report brought to you by Invesco QQQ, let's bring in Cinthia Murphy, ETF Think Tank director of research here.

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Cinthia, the Mag Seven certainly been a very popular trade when you think about ETFs. What are the fund flows been like as we continue to get these quarterly results from the big names?

CINTHIA MURPHY: Yeah, Akiko. It's been like, in the last year or so, investors can't get enough of the Mag Seven. As you well know, a lot of money has gone into everything from your big classic tech funds, your QQQ's of the world, and into, like, more the AI-focused type of strategies. It's been like anywhere you find, some of these names-- you're NVIDIA's, your AMD, your Microsoft's, Apple's, the money has gone there. So far in 2024, we're starting to see a little bit of a pause there, a little bit of a hesitation because there are views like there's a little bit of uncertainty on what this looks like going forward. But appetite has been strong for these names as across ETFs, across just the stock market directly, anywhere they can get their hands on them.

RACHELLE AKUFFO: So Cynthia, as we hone in on AI, I mean, you have some of these that are pure tech ETF plays. You have some that are more AI as a theme, but include different pockets of things. And then you have some of these companies that are almost planning on using AI as a co-pilot to fuel their business growth. What are some of the ones that you like as you dig down into some of these different segments?

CINTHIA MURPHY: So what's interesting about the AI space is it says there are so many ways to tackle it. AI, as an investment theme, like you actually want to capture that AI innovation, that disruption. These AI funds come in many different flavors. Some are all robotics. Some are broader takes. And you can slice and dice this in different ways. What's been interesting is that since ChatGPT came out about a year ago or so, all that hype, all that enthusiasm over the innovation in this space has really kind of cooled down. It's like we've gone from the hype to like, growing pains, a little bit of maturity, sinking in.

And-- but from an investment perspective in the ETFs, what has really worked well is concentration. So the more Mag Seven you have in your AI portfolio, the better you've done. Going forward, that may or may not be the case. Most market strategists are calling for diversification, you know, be wary of too much AI exposure. So as an investor, what you really have to do is take a look at what is that portfolio looks like. So one of the classic AI battles is between funds like robo versus bots, which were the two first robotics-focused ETFs.

And they're a classic example of this, because with bots, NVIDIA is like the biggest holding it. It represents so much of the portfolio exposure, where robo is much more diversified, tilts much more smaller cap. So it hasn't performed as well. But going forward, if the diversification becomes the way to go about this, you ought to look out for those kinds of things. How much are you concentrated on the top names. So these are the ways to think about this space as you look to invest.

AKIKO FUJITA: Is that what you're advising clients, Cynthia, to not necessarily throw all your eggs in one basket? But if you are going to invest in a broadly, maybe to diversify a little?

CINTHIA MURPHY: This is what we're hearing from people that we've been talking to. It is the call for diversification. Now, it's really tough to embark on diversification when you've seen the kind of performance Mag Seven has delivered. It's easy to want to bet on the winners big time. But everyone we've been talking to this year is really cautious. We don't know what the Fed's going to say. We don't know what the environment is going to be for growth names. There's a lot of call for slowdown on growth. Let's go into more cyclical sectors. This has, if you look at forward P/E earnings, these companies are so overvalued relative to the rest of the market.

So is there a period of consolidation coming? All of these things are suggesting, watch out for diversification. Make sure your portfolio is not heavily tilted just towards two or three names. It's all about risk management, at the end of the day.

RACHELLE AKUFFO: And speaking of risk management, I have to talk about spot Bitcoin ETFs. So now, we have-- just obviously, still early days, but at least some sense of some of the flows here that we're seeing, we're seeing Grayscale Bitcoin Trust seeing net outflows of about $5 billion recipients though, really benefiting from this BlackRock and Fidelity. What are we seeing as this is becoming slightly more mature, even though it is still early days here?

CINTHIA MURPHY: Yeah. It's been a busy two weeks for these ETFs. I think no one is too surprised to see the outflows from GBTC. If you remember, that was a private trust before it converted into an ETF. So all that money was locked in there. And this is the first opportunity these investors have to really get out. And GBTC costs three, four, or five times as much as some of the other ETFs. So as an investor, we've seen some of that money get out, they lock in their profits, and they may go to cheaper funds. We can't really relate 1 to 1 here.

But the ETFs that came out other than GBTC, they're so low cost. The access points are very low and easy entry. So we're starting to see money flow. The good news is, outside of GBTC, all nine ETFs have seen positive inflows. So demand is there. We also are starting to see who's emerging as category leaders. And maybe to no one's surprise, companies like iShares, Fidelity, the Big Box shops are leading the race here.

But there's also interesting momentum behind the more what we call the crypto natives. Funds like Bitwise and ARK, even, is getting some strong flows here. So it's a space where so far, everyone is doing well outside of GBTC, and-- but maybe hasn't been the blockbuster. We haven't seen $100 billion go into these funds in two weeks. So I think sentiment is a little more tempered. And we're waiting to see what when does GBTC stop leading and how things settle down.

RACHELLE AKUFFO: We'll certainly keep a track of that, especially as we await the Bitcoin halving, of course, coming up in April as well. A big thank you there to Cinthia Murphy, ETF Think Tank director of research for joining us this morning. Thanks so much.