Strategy

Time to Consider Diversification from Nvidia and Magnificent 7? Here’s How.

Chris Heakes
MFin, CFA, Director, ETF Portfolio Manager
Mar. 5, 2024

U.S. equity markets are off to a strong start on the year with the S&P 500 Composite Index already up 6.3%, slightly trailing the 6.5% return of the Nasdaq 100 Index. The year-to-date rally has been a continuation of the rise in risk assets that started in late October of last year.


Funds in Focus: 

BMO MSCI USA High Quality Index ETF (Ticker: ZUQ) 
BMO Nasdaq 100 Index ETF (Ticker: ZNQ)
BMO Covered Call Technology ETF (ZWT)


  • Diversified portfolios of high-quality stocks screened on high return-on-equity (ROE), low-earnings variability and low financial leverage.
  • Maintain exposure to Magnificent 7 while reducing concentration risk. 
  • ZWT’s covered call overlay offers additional yield potential through options premiums.


Diversifying Away from Nvidia and Magnificent 7

A closer look at the composition of the rally so far this year shows the majority of the returns have come from Nvidia Corp. and to a lesser extent from Microsoft Corp. Tailwinds in the Artificial Intelligence (“A.I.”) theme have significantly benefitted Nvidia with the stock up more than 1,950% in the last five years. 

Although expectations have become ever loftier, the semiconductor company continues to significantly exceed analyst targets on its quarterly earnings. This makes it challenging for investors to fully divest the stock, though taking some profits at this point would certainly be prudent. Both Nvidia and the Magnificent 7 (consisting of Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms and Tesla) are notably outpacing the S&P 500 Composite Index over the last three years. 


Nvidia & Magnificent 7 vs. Broader Market

Nvidia & Magnificent 7 vs. Broader Market
Source: BMO Global Asset Management, as at January 31, 2024. Index returns do not reflect transactions costs or the deduction of other fees and expenses and it is not possible to invest directly in an Index. Past performance is not indicative of future results.

At this point in the cycle, our view is that investors may well want to consider diversifying away from Nvidia and other Magnificent 7 stocks by utilizing a broader-based ETF. By doing so, investors can maintain exposure, while reducing overall concentration risk. Given most of the rally in recent months was driven on hopes of aggressive rate cuts by the U.S. Federal Reserve, strong economic data leading to a less dovish policy environment may warrant broadening out equity exposure to a portfolio of stocks rather than single securities that may be more vulnerable to price corrections. 

There are a number of ways in which investors can diversify with an ETF while maintaining exposure to Nvidia and/​or the Magnificent 7. 


Below are three options worth exploring:

1) BMO MSCI USA High Quality Index ETF (Ticker: ZUQ)1 | BMO MSCI USA High Quality Index ETF – USD Units (Ticker: ZUQ.U) | BMO MSCI USA High Quality Index ETF – Hedged Units (Ticker: ZUQ.F)

Diversification Benefits:

  • Holds a diversified portfolio of high-quality stocks screened on high return-on-equity (ROE), low-earnings variability and low financial leverage.
  • Technology makes up 37.5%2 of the portfolio, with a focus on higher quality, cash-rich companies.
  • Has exposure to the Magnificent 7, with the exception of Amazon and Tesla
  • Good way for investors to also get exposure to high-quality names outside of technology
  • Management fee of 0.30%

2) BMO Nasdaq 100 Index ETF (Ticker: ZNQ)1| BMO Nasdaq 100 Index ETF – Hedged Units (Ticker: ZQQ)

Diversification Benefits:

  • The Nasdaq-100 has historically been known as a high-growth U.S. equity index
  • Has exposure to the Magnificent 7 as well as being made up of 50.4%3 Technology holdings
  • Management fee of 0.35%

3) BMO Covered Call Technology ETF (ZWT)

Diversification Benefits:

  • Diversified portfolio of 28 large-cap technology and tech-related names
  • Includes a covered call overlay to generate additional yield.
  • Suitable for investors looking for U.S. technology exposure with some yield as technology names typically pay low dividends if at all
  • Management fee of 0.65%

1 Changes in rates of exchange may also reduce the value of your investment.

2 As at January 31, 2024.

3 As at January 31, 2024.

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