Many people have part of their savings in the SPY ETF or mutual funds that include the insanely priced Mag 7 stocks. These companies have such high valuations that they distort the entire S&P 500 population. The Mag 7 stocks represent almost 40% of the S&P 500 capitalization now. The Mag-7 average a P/E of almost 30, whereas a PE of 15-17 is considered historically normal. Meta and Microsoft are close to the historical range, but Tesla is hanging out there at around 400 P/E. And there is an expectation that Tesla will soon be rolled up under SpaceX. SpaceX has a P/E of infinity. They are losing money bigly every quarter.
So what is an investor to do in this situation if one believes a) the Mag 7 companies are fundamentally overvalued, b) they are making a big mistake by dumping trillions into new AI data center capacity, and C) everything Musk does is ultimately a fraud of unprecedented proportions?
In an ideal world, there would be an ETF that includes the 500 companies, minus anything Musk has his fingers on. There is no such vehicle today, AFAIK. A sophisticated investor might buy the full index, but hedge against at least the Musk companies through options. Another strategy is a S&P 500 "equal weight" fund or ETF. In these funds, the Mag-7 have 4/500 weight instead of their almost 40% weight. These equal-weight funds have underperformed the S&P 500 in the past decade, but that's the point. The big "gains" have largely come from the crazy-valued mega-cap stocks. If one believes they are headed for an implosion, then an equal-weight fund might be a sensible alternative.
Any opinions about this?
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