Using ETFs To Short The Magnificent Seven!?

Before we do anything, real quick …

Holy crap!

We refrain from showing you the top overall stock searches in Trackstar because they tend to be the same names. However, today seeing the usual suspects makes sense. 

For two reasons. 

In case you’re new around here, our Trackstar database measures the searches retail and professional investors make across our 100+ financial media partners, then ranks tickers based on this search interest. 

And, in something we don’t see all that often, Nvidia (NVDA) is nearing 1 million searches. 

At nearly double the interest of #2 Tesla (TSLA) and more than double that of Apple (AAPL), Amazon.com (AMZN) and Microsoft (MSFT), that’s just insane. 

We’ll let you know if NVDA hits a million searches. Let’s do a shot together if it does. 

In any event, all five of those names, along with Meta Platforms (META) and Alphabet (GOOGL), make up the fabled Magnificent Seven stocks. 

A formidable, market-crushing bunch. 

Which is why we were taken aback by the email we received from a Juice subscriber in response to a recent installment where we updated the performance of our top stock and ETF picks for 2024. 

The subscriber asked:

Can you recommend an ETF that is a short position on the Magnificent Seven?

Can we recommend one? 

Um, no. That would be crazy. However, we can answer the question of whether or not one exists. 

But first, some context. Basically a warning. 

Consider the YTD, 1-year and 5-year performance of the Magnificent Seven stocks. 

With the recent exception of TSLA, shorting any of these names would have likely rendered disastrous consequences, unless you’re a nimble day or swing trader. But we don’t recommend that profession or pastime for most people. 

With no exceptions, shorting this basket of stocks over any period beyond a moment in time would have been an unmitigated disaster. Simply put, it could have ended in insolvency. 

Of course, past performance doesn’t necessarily predict future results. But we’ll hold our head high if these stocks all collapse in the coming months (or even years). Because it’s just not a good idea to bet against these leaders. The trend, in this case, has been your friend. And, even if their (out)performance slows, we think the trend will continue to be your friend. 

So, don’t fight it. 

That said, an ETF that’s (kind of) a short position on the Magnificent Seven does exist. It’s called the Roundhill Daily Inverse Magnificent Seven ETF (MAGQ).

As the fund company says in its literature:

The Roundhill Daily Inverse Magnificent Seven ETF (the “Fund”) seeks daily investment results, before fees and expenses, that correspond to the inverse (-1X) of the performance of the Roundhill Magnificent Seven ETF (the “Magnificent Seven ETF”). The return of the Fund for periods longer than a single day will be the result of its return for each day compounded over the period.

The Fund presents different risks than other types of funds. The Fund is not suitable for all investors. The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily inverse (-1X) investment results, understand the risks associated with the use of leverage, and are willing to monitor their portfolios frequently.

You could find any number of inverse or short leveraged ETFs that go up when the major indices (or some other index) goes down. If it’s a Nasdaq 100 or S&P 500 tracking ETF, it will be heavily influenced by the Magnificent Seven. 

That said …

As we said in a very popular Juice that bears repeating all of the time:

A leveraged ETF uses debt or options to amplify the returns of a stock market index …

The key word (associated with these types of ETFs) is daily. On any given day, TQQQ and SQQQ will generate the exact same return as QQQ, but times three. If QQQ is down 1.93%, expect TQQQ to be down roughly 5.79% and SQQQ to be up by right around the same amount. 

You can buy leveraged ETFs—long and short—to replicate two or three times the returns of not only indices, but even individual stocks. You can, but, in most instances, you shouldn’t. 

As a long-term investor, you might think if I’m bullish SPY or QQQ, why not buy an ETF that generates two or three times the performance? Because of the key word daily. The instruments used to achieve the amplifying effect function on a daily basis. They do not replicate long-term results. In fact, the typical holding period for a leveraged ETF, such as TQQQ or SQQQ, is one to two days. They’re meant for experienced traders and financial advisors (thus, their appearance in Trackstar, filtered to financial pros only), not new or long-term investors.

In that Juice, we were referring to the ProShares UltraPro QQQ (TQQQ) ETF and ProShares UltraPro Short QQQ (SQQQ) ETF. 

Fine and good. But the index doesn’t matter. Neither does looking at the performance because it’s irrelevant. 

If anything, these ETFs can act as short-term hedges in a portfolio. But only experienced investors should mess with this. If you want a hedge, buy a put. 

Even two of the big players in the space — ProShares and Direxion — warn that these are not suitable ETFs for buy-and-hold investors. Here again, even if you’re intent is to capitalize on downside, just buy a put. 

Inverse ETFs — or short or leveraged ETFs, however you see them classified — aren’t meant to ride the wave, in either direction, of a basket or index of stocks. 

To make it work, you really have to know what you’re doing and understand exactly how these ETFs function. This involved a complicated structure and a fair bit of heavy math. 

The Bottom Line: Put this one in the keep it simple department. 

While we would strongly advise against getting short — via options or by shorting the stocks themselves, especially — the Magnificent Seven, we have to ask why. Why would you want to do this when there are so many other good short opportunities and a ton of long opportunities out there? 

This ain’t Las Vegas. 

Particularly if you’re investing for retirement. Don’t look for some big home run by trying to get fancy. Invest in the market leaders consistently over the long haul. Be extra weary of betting against them. Just because they have gone up for a long time doesn’t mean they can’t continue to go up.

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