How can I invest in America but avoid the Magnificent Seven?

Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

Times are changing, however. Generative artificial intelligence could reshape whole industries, and investors are scrambling to figure out who the winners and losers will be. For now, sentiment has soured on software giants such as Workday, ServiceNow and Salesforce. The prevailing view is that AI will disrupt these providers, as it can write its own code. Among the ‘Magnificent Seven’, Microsoft has been hit particularly hard.

Investors are also worried about the huge spending plans unveiled by the likes of Meta and Amazon. These companies are pumping money into AI infrastructure, such as data centres, and the return on this investment is still uncertain.

As a result, volatility is high in the sector and America’s biggest tech firms are underperforming the wider market this year.

Nobody knows for certain whether this rotation within the US stock market will continue. Like you, however, many investors are keen to diversify. A traditional US tracker fund is heavily concentrated in the region’s biggest stocks, with the 10 top holdings representing almost 40% of the whole portfolio.

So what are your options?

1. Legal & General S&P 500 US Equal Weighted Index Fund. An equal-weighted tracker fund won’t eliminate the Magnificent Seven entirely. However, it will substantially underweight them.

This L&G fund allocates the same importance to small companies as huge ones. For the S&P 500, this means you get the identical exposure to Nvidia as to the index’s smallest player. As such, they are a fuss-free way to scale back Big Tech exposure, and to invest in lesser-held sectors like utilities and healthcare.

This is a relatively new fund - it only launched in October 2024 - but it has tracked the underlying index closely. With an ongoing charge of 0.15%, it is also suitable for cost-conscious investors. 

2. Dodge & Cox Worldwide US Stock Fund. This contrarian fund seeks out American companies that have fallen temporarily out of favour. It focuses on metrics such as future earnings, cash flow and dividends to identify long-term growth potential.

Healthcare, financial and industrial businesses are particularly well represented, with top holdings including Charles Schwab, RTX and CVS Health. Dodge & Cox does not shun the Magnificent Seven entirely, but information technology only represents 8% of the fund compared with a third of the S&P 500.

3. Brown Advisory US Smaller Companies. This fund invests in around 65 smaller companies listed in the US. These businesses are often riskier than their larger counterparts due to their size. However, the fund has an extensive research team, and company valuations often get more attractive as your go down the market cap spectrum. 

This fund could act as a useful diversifier but is likely to require a long investment horizon of ten years or more. This should allow you to benefit from the rewards that should come from an above-average-risk investment.

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