The Weight of Giants and the Promise of the Small

Stock Market Reflection

The so-called “Magnificent Seven” – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – stand as colossal monuments to recent market excess. Their valuations, exceeding a trillion dollars apiece, are not merely figures on a ledger, but a testament to a collective belief, a suspension of traditional prudence. To observe their ascent is to witness a peculiar form of modern faith – a faith predicated not on demonstrable worth, but on the expectation of continued, almost indefinite, expansion. Meta, the least ascendant among them, still boasts a decade of returns exceeding 540% – a figure that, while astonishing, serves only to highlight the general distortion of value. Compared to the S&P 500’s more modest gains, the disparity is… instructive.

Yet, the past twelve months have offered a faint, but not negligible, tremor in this edifice of confidence. The S&P 500, that broad measure of the American economy, has, in many instances, outpaced these giants. Alphabet and Nvidia stand as exceptions, but even their performance feels less like organic growth and more like a desperate clinging to altitude. A hesitancy, a subtle withdrawal of capital, is becoming palpable. To ignore this is to court the illusion that the laws of gravity have been repealed.

The question, then, is not simply whether these stocks remain “good” investments, but whether continuing to concentrate capital in so few hands is a prudent strategy. Might this be the year to turn attention to the smaller, less celebrated corners of the market – to the small-cap stocks, those often-overlooked enterprises struggling to establish themselves?

Market Observation

The Illusion of Security in Magnitude

There is, of course, a comforting narrative surrounding these established behemoths. They are, undeniably, strong businesses, generating substantial profits. Their sheer size affords them a degree of resilience, a capacity to adapt and weather storms. They possess the financial resources to pivot, to acquire, to innovate – advantages denied to their smaller counterparts. This is true, but it is not the whole truth. Magnitude, while providing a buffer, also creates inertia. It fosters a complacency, a reliance on scale rather than on genuine innovation. And it obscures the underlying vulnerabilities.

The Roundhill Magnificent Seven ETF (MAGS) offers a convenient, if somewhat uncritical, means of participating in this concentration of wealth. Its expense ratio, at 0.29%, is not exorbitant. In the past year, it has risen by around 15%. This, however, is a return built upon an already elevated base. It is a continuation of a trend, not a fundamental shift in value.

To venture into small-cap stocks is to embrace a degree of uncertainty, to acknowledge the inherent risks of supporting enterprises still in their formative stages. They often require infusions of capital, a lifeline dependent on favorable economic conditions. With the prospect of interest rate cuts diminishing, the environment for these nascent businesses becomes increasingly challenging. And yet, it is precisely in these conditions that true value often resides. The Roundhill fund, while not entirely without merit, offers a continuation of the existing imbalance. It is a bet on the perpetuation of a trend, not a search for genuine opportunity.

The Dignity of the Undervalued

To invest in individual small-cap stocks is fraught with peril. But to diversify through an ETF such as the iShares Russell 2000 ETF (IWM) is to mitigate that risk, to spread capital across a wider spectrum of enterprises. With nearly 2,000 holdings, and no single constituent accounting for more than 1% of the fund’s total weight, it offers a degree of resilience that the concentrated Roundhill fund simply cannot match.

Even if some of the fund’s constituent companies falter, the lack of significant exposure to any single entity provides a measure of protection. And its expense ratio, at 0.19%, is even more modest than that of the Roundhill fund, despite offering significantly greater diversification. In the past year, the ETF has risen by 17% – a return that, while not spectacular, is grounded in a broader, more sustainable base.

By investing in the iShares fund, one gains the benefit of both reduced risk and the potential to participate in the growth of emerging small-cap stocks. In 2022, when the S&P 500 suffered a 19% decline, the iShares Russell 2000 ETF experienced a slightly worse drop of 22%. However, every single one of the Magnificent Seven performed even worse. Apple, the “best” performer among them, still declined by 27%.

Ironically, investing in the iShares Russell 2000 ETF may, in the long run, prove to be the safer course. The heightened valuations of the Magnificent Seven render the Roundhill fund vulnerable to a potentially steep correction. The weight of giants is, after all, a precarious burden. This year, therefore, I would direct capital towards the iShares fund – not as a pursuit of spectacular gains, but as an act of prudent preservation.

2026-01-23 06:03

The Illusion of Security in Magnitude

The Dignity of the Undervalued

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