2023 was a great year for the stock market.
But it was an epic year for a handful of select stocks.
The “magnificent seven,” Amazon, Alphabet, Apple, Meta, Microsoft, Nvidia, and Tesla, soared 112% (equally weighting each). They outperformed both the SPDR S&P 500 ETF Trust (SPY), which is weighted by market cap, and the Invesco S&P 500 Equal Weight ETF (RSP), which weights each stock equally.
This illustrates the benefit of holding the right stocks, as you can see in the chart below. Concentration can lead to outperformance, if you get the big idea right. That’s easier said than done.
To get the big idea right, I believe you should invest in and around dominant changes, megatrends, or what I call themes. Get the most important themes right and you have a framework for understanding the world and how to invest in it. That framework will help you avoid second guessing, wondering if you’re in the right investments (and perhaps exiting at the wrong time). It will also help you avoid the wrong stocks.
For example, on November 3, I noted that global shipping company Maersk’s 10% jobs cut was predictable. My research team and I had been discussing a downturn in container shipping for months, due to reshoring and nearshoring. If more products are made in North America, fewer products will be shipped this way from China. This is a durable trend. Shippers are collateral damage.
Source: @EdDAgostino
Oddly, one way to gain concentrated exposure to big trends is through niche ETFs. I say “oddly” because, while many people consider ETFs great diversification tools, oftentimes they are not.
Even well-known ETFs have a lot more single-stock concentration than you’d anticipate. Take a look at the next chart, which shows the heaviest-weighted stock within popular ETFs.
Did you know the Energy Select Sector SPDR Fund (XLE), which has 23 holdings, has a 22.68% weighting to Exxon Mobil Corp. (XOM)? That’s fine, as long as you want that level of concentration. But if for some reason you’re bullish on energy, yet bearish on Exxon, this ETF won’t serve your needs.
The Technology Select Sector SPDR Fund (XLK) is even more skewed. XLK has 64 holdings, but two stocks, Microsoft (MSFT) and Apple (AAPL), comprise 44% of it.
Moving forward, I believe niche ETFs (much more narrowly focused than the ones above), along with individual stocks set to benefit from dominant themes, will outperform both the market and broad-based ETFs, especially when you take volatility into account.
There’s an ETF for almost any idea you can think of. Are you bullish on Polish stocks? Check out the iShares MSCI Poland ETF (EPOL). Bullish on Singapore? Check out the iShares MSCI Singapore ETF (EWS). How about robotics and automation? Look into the Robo Global Robotics and Automation Index ETF (ROBO). Note: These are not recommendations, just examples.
I like niche ETFs, but they have an important similarity to individual stocks. You need to know what you’re buying. Take a look under the hood.
It’s a stock (and niche ETF!) picker’s market, driven by macro trends. To invest accordingly, you’ll need rigorous “top-down” research (getting the themes right) combined with “bottom-up” equity analysis (smart stock picking).
That’s what I’ve been working on with an elite group within Mauldin Economics for over a year. I look forward to sharing more about our efforts and how we view the markets in 2024. I’ll have all the details for you on Wednesday. I hope you’ll join me.
Best regards,
