What is the Magnificent 7?

The Magnificent 7, also known as the Mag 7, is a group of influential tech companies that have consistently outpaced industry expectations in terms of growth. Michael Hartnett, an investment analyst with Bank of America, coined the term when he recognized a need to group certain stocks together based on their market performance and overall impact on society.

A tech company included in the Mag 7 grouping isn't just financially successful — it has the power to shape consumer behavior. Consider how Apple revolutionized mobile phones or Tesla influenced consumers to embrace electric vehicles. That's the type of innovation at play.

Mag 7 stocks also have a major impact on broader market behavior. When they perform well, the overall market tends to perform well. Learn more about the Magnificent 7, including what they are, why they matter, and how you can add them to your investment portfolio.

Defining the Mag 7

While "Mag 7" sounds like a single investment option, it's actually a group of seven individual stocks:

• Alphabet (Google)
• Amazon
• Apple
• Meta
• Microsoft
• Nvidia
• Tesla

If you look closely, you'll notice these companies all have one thing in common. They're known for disrupting industries and changing the way consumers and businesses approach everyday tasks. Each company also offers high-tech products or services, although the Mag 7 spans several industries, including tech, communication, and electric vehicles.

Keep in mind that Mag 7 is just an informal market label. It's not an official index, such as the Dow Jones Industrial Average or the Russell 2000 Index. 

Evolution from FAANG to Mag 7

The Mag 7 moniker is an update to an older acronym: FAANG (Facebook, Apple, Amazon, Netflix, Google). Netflix isn't included in the new grouping because its performance — growth trajectory and market cap — doesn't quite match that of Apple, Tesla, and other Mag 7 companies.

Nvidia and Tesla were added to the grouping due to their large market caps (the total dollar value of a company's issued and outstanding shares) and spectacular performance, along with the increased demand for specialized chip systems and electric vehicles (EVs). The new grouping accounts for a major shift toward artificial intelligence (AI), cloud computing, EVs, and chip dominance.

Why the Mag 7 matters to investors

No matter how tech-savvy you are, the Mag 7 can have a big impact on your investment returns. Each stock has a large market cap, so even small price changes can result in significant gains or losses.

This is true whether you buy single stocks or engage in passive investing with index funds. For example, many retirement plans allow participants to invest in index funds, so there's exposure to the Mag 7, even if you don't manage your own investments.

The S&P 500 is a weighted index, so price movements within the Mag 7 can have a much bigger impact than price movements for companies with smaller market caps. Mag 7 companies dominate the S&P 500 and Nasdaq 100 indexes. This means their performance can significantly sway index returns, even for investors who never purchase individual shares.

Mag 7 common traits and business strengths

Mag 7 companies share several characteristics, including:

• High growth potential. The potential for growth depends on many factors, such as financial performance, competitive advantage, market trends, and valuation. When you apply these conditions to the stocks in the Mag 7, it's clear each company has strong growth potential. All seven companies have outperformed financial expectations, and they're all well-positioned to capitalize on market trends.
• Global reach. Companies with a global reach have more opportunities to sell their products and services. Members of the Mag 7 are household names all over the world, not just in the U.S.
• Innovation. The Mag 7 companies are highly innovative, so they tend to create trends instead of following them. For example, Apple's introduction of the iPad completely changed the way people consume media.
• Strong cash flow. All seven companies also have strong cash flow, enabling them to purchase inventory, cover expenses, and invest in their growth.
• Leadership in key trends. Members of the Magnificent 7 lead the market in AI, cloud computing, digital ads, e-commerce, and electric vehicles. For example, Alphabet's introduction of Google PPC advertising changed the way businesses connect with customers. Instead of paying an advertising agency, a small business owner can create and manage their own digital advertising campaigns, giving them better control of their costs. All seven companies are also incorporating AI and cloud computing into their business models.
• Consistent reinvestment in R&D and long-term strategy. Mag 7 companies consistently invest in research and development. Their leaders also think ahead, allowing them to develop effective long-term strategies rather than focusing solely on current market conditions.

Risks and challenges of the Mag 7

Investing in the Mag 7 offers the potential for unmatched growth, but it's crucial to consider the risks. These stocks dominate the market, so they may be slightly overvalued based on trading volume and consumer perception. 

These companies have also grown so rapidly that previous growth levels may not be sustainable. They're subject to several types of regulatory scrutiny. For example, all seven companies have to pay taxes in multiple jurisdictions, increasing the risk of costly errors.

Some countries have strict antitrust laws designed to prevent monopolies from forming. If a Mag 7 company runs afoul of these laws, the fallout could affect market performance. 

Tech companies must also comply with privacy regulations, such as the General Data Protection Regulation in the European Union. If a company violates one of these regulations, the resulting fines and penalties might affect its financial performance. Serious violations may also result in reputational harm.

How investors can gain exposure

If you want to invest in the Magnificent 7, you can gain exposure with an exchange-traded fund (ETF) or a mutual fund that weights these companies heavily. ETF options include the Mega Cap Growth ETF (MGK), the iShares S&P 500 ETF (OEF), and the Roundhill Magnificent 7 ETF (MAGS).

If you prefer mutual funds, consider the Schwab S&P Index Fund (SWPPX) or the Vanguard Total Stock Market Index Fund (VTSAX). You can also invest directly in your favorite companies or choose tech-focused funds within your retirement accounts.

Buying individual stocks may offer higher potential returns, but it comes with more risk. Diversified ETFs and mutual funds reduce exposure to any single company's performance. Every investor's circumstances are unique, so consult an experienced financial advisor if you need help determining the best approach for your financial situation.