Best ETFs Help Investors Cut Exposure To Magnificent Seven

Amid lingering market volatility and high concentration in "Magnificent Seven" tech stocks within broad indices, Cabot Wealth Management's CIO Craig Goryl advises institutional investors to diversify with three specific ETFs. He recommends VanEck Morningstar Wide Moat (MOAT) for U.S. companies with sustainable competitive advantages, SPDR MSCI Emerging Markets Strategic Factors (QEMM) for quality-focused global exposure, and JHancock Mortgage-Backed Securities (JHMB) for high-credit-quality, actively managed fixed income, emphasizing a strategy of preparation over prediction.

Analysis

Amid market volatility and record highs, Cabot Wealth Management's CIO Craig Goryl highlights a critical risk: the heavy concentration of broad market indices in a few large-cap technology stocks, with the "Magnificent Seven" comprising approximately one-third of S&P 500-tracking funds. The firm's investment philosophy, centered on preparing for various outcomes rather than predicting them, leads to a recommendation for specific ETFs that offer diversification and quality. The first, VanEck Morningstar Wide Moat (MOAT), targets high-quality U.S. companies with sustainable competitive advantages and is up 6.7% year-to-date. For international exposure, SPDR MSCI Emerging Markets Strategic Factors (QEMM) is recommended for its focus on quality attributes like profitability and low debt, which has contributed to its 14.2% year-to-date performance. In fixed income, Goryl points to the current environment of narrow credit spreads, where investors are not adequately compensated for taking on credit risk. Consequently, he suggests JHancock Mortgage-Backed Securities (JHMB), an actively managed ETF that offers a 4.9% SEC yield by focusing on high-credit-quality agency mortgages and seeking inefficiencies in the non-agency mortgage market.

Key Decisions for Investors

• Investors should assess their portfolio for over-concentration in large-cap technology and consider diversifying with quality-focused U.S. equity funds like MOAT to mitigate single-sector risk.
• Consider allocating to emerging markets through strategic factor ETFs like QEMM, which aim to capture international growth while filtering for quality to sidestep the volatility of lower-quality businesses in developing economies.
• In the current fixed-income environment of narrow credit spreads, prioritize high credit quality and consider actively managed mortgage-backed securities funds like JHMB for an attractive yield without significant credit risk.
• Adopt a long-term strategy of holding durable, high-quality assets through full market cycles, reflecting a philosophy of preparing for a range of economic outcomes rather than attempting to time the market.