Tracker funds that avoid the Mag 7, chip stocks and SpaceX

Q. How can I avoid exposure to the Mag 7, semiconductors and SpaceX?

A. SpaceX shares are down by more than 40% since their peak. Semiconductor stocks (‘semis’) have lost 28.7% since they hit a record high on 22 June, according to the Philadelphia Semiconductor index. And the ‘Magnificent 7’ technology companies are collectively 12.2% lower since their peak in mid-May, to judge by the Solactive US Mag 7 PR index. 

Investors could be forgiven for thinking that worse may be to come if a bubble in such hi-tech areas has indeed begun to deflate. At the same time, they may want to maintain exposure to the broader stock market rather than seek refuge in cash or bonds. 

Where can you go if you want to steer clear of semis, the Mag 7 and SpaceX without quitting the market entirely? Fortunately, there is no shortage of options, even if you prefer funds to choosing your own stocks. We do however need to bear in mind that while the Mag 7 and SpaceX are American, some of the biggest semiconductor companies are Asian and European, so merely avoiding the US may not be enough.

Here are some of your fund options.

Equal-weighted funds

Traditionally, stock market indices, and the passive funds that tracked them, were put together on the basis that the bigger the company, the greater its weighting in the index. So in an S&P 500 tracker, for example, Nvidia (current market value $4.6 trillion) was a much bigger holding than, say, Boeing (market value $170bn). Equal-weighted indices disregard the size of companies and give them all equal billing in the index. An equal-weighted S&P 500 tracker has one 500th of its money in Nvidia and the same in Boeing, and so on for all the other constituents.

Most investors worried about exposure to the Mag 7 and other tech firms could probably live with such small weightings. Equal-weighted tracker funds to consider include the Legal & General S&P 500 US Equal Weight Index Fund (a member of Fidelity’s Select 50 range of recommended funds) and the Invesco MSCI World Equal Weight ETF.

Mid-cap or small-cap funds

A simple way to avoid the tech giants is to invest in small or medium-sized companies, via a tracker fund such as the Vanguard Global Small-Cap Index Fund, a Select 50 member, or the State Street SPDR S&P 400 US Mid Cap ETF.

‘Low-volatility’ funds

These funds invest in companies whose share prices have tended not to suffer big ups and downs. In practice, this steers them towards more defensive, well-established businesses. One such fund, the State Street SPDR S&P 500 Low Volatility ETF, aims to track an index that measures the performance of the 100 least volatile stocks in the S&P 500 index. Its top 10 holdings have no Mag 7 representation and instead include Berkshire Hathaway, Johnson & Johnson and several energy firms.

A UK, Europe, Japan or emerging markets fund?

Such funds may be only a partial solution. One of the striking aspects of the recent boom in semiconductor stocks is the part played by the Korean stock market, home to Samsung and SK Hynix. Taiwan’s market, meanwhile, is dominated by TSMC (Taiwan Semiconductor Manufacturing Company), while Europe’s largest company by market value is ASML, which produces the sophisticated machines that make high-end chips. 

As South Korea and Taiwan are both considered to be emerging markets, Samsung, SK Hynix and TSMC are likely to be included in emerging market tracker funds, such as the iShares Core MSCI EM IMI ETF, while European trackers such as the Vanguard FTSE Developed Europe ex UK ETF will own ASML, typically as their largest holding. 

Japan is not an emerging market but it is home to semiconductor stocks such as Tokyo Electron. However, this company accounts for just 3.1% of the iShares MSCI Japan ETF, a popular Japan tracker. The London market, for better or worse, is virtually devoid of tech companies, so the iShares Core FTSE 100 ETF would be a safe choice for those who wish to avoid such stocks. 

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is no guarantee that the investment objective of any Index Tracking Sub-Fund will be achieved. The performance of the sub-fund may not match the performance of the index it tracks due to factors including, but not limited to, the investment strategy used, fees and expenses and taxes. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.