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2024: Breaking Away from the Magnificent 7 – Could Equal-Weight Nasdaq be the New Star?

February 02, 2024
Six layers of identical 3D financial lines on a graph, each a different color

The winning equity trade of 2023 was (in hindsight) simple: Buy and hold the so-called Magnificent 7 mega-cap tech stocks. We’re talking Alphabet, Meta, Tesla, Nvidia, Microsoft, Apple and Amazon. These names returned an astounding 111% on average, as investors embraced solid earnings as well as the generative artificial intelligence (AI) craze. The performance of these behemoths in turn drove the cap-weighted Nasdaq-100® Index (XNDX)* higher, with the index rising 54% for the year.

But what worked in 2023 may not work—or work as well—as it did in the coming 12 months. With this in mind, investors may want to consider the possibility that the Nasdaq rally broadens out beyond just the biggest of the big. If this happens, the Nasdaq 100® Equal Weighted Index (NETR)* could be ripe for outperformance. Think of it like betting that the laggards of last year could potentially morph into the leaders of 2024.

Daily chart of QQQE, as of January 16 2024

Source: StockCharts.com, January 16, 2024.

Candlestick charts display the high and low (the stick) and the open and close price (the body) of a security for a specific period. If the body is filled, it means the close was lower than the open. If the body is empty, it means the close was higher than the open.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted. For the most recent month-end performance go to Direxion.com/etfs. For standardized performance click here.

2024: The Year for Equal-Weight Nasdaq to Shine?

There are many reasons to suspect that 2024 might see the Magnificent 7 stocks lag—and the smaller Nasdaq names lead. Mean reversion is one consideration. As Todd Sohn, ETF strategist at Strategas recently pointed out, the headline Nasdaq-100’s performance last year was in the top decile historically. What’s more, he noted that the return for the equal-weight S&P 500® Index* relative to the cap-weighted S&P 500® Index* was in the bottom decile historically. A similar phenomenon was observed in the Nasdaq, where the equal-weight index (NETR) returned 34% last year vs. 54% for the cap-weighted benchmark (XNDX).

Investors may decide that it’s time for a catch-up trade and buy the smaller names as a result. We may already be seeing hints that this rotation is afoot. From late October to the end of December, the NETR outperformed XNDX (20.6% vs. 18.9%). However, past performance is not indicative of future results.

Lower Rates Have Been Good News for the non-Mag 7 Stocks—and this Could Continue

It just so happens that NETR started outperforming right around the time that the U.S. 10-year bond yield* peaked just shy of 5%. Here’s why bond yields could continue drifting lower in 2024, helping to propel NETR vs. mega-cap tech:

  1. Entrenched Disinflation: Bond markets love falling inflation*, and that’s what we have. Headline CPI* is now well under 4% and looks set to fall further, especially with goods inflation on the wane.
  2. Rising Recession Risks: Bonds also love the prospect of recession. While the consensus is for a soft landing this year, a hard landing could be in the cards instead. It’s been 15 months since the yield curve* first inverted—and historically that’s when the chickens come home to roost in the form of negative real gross domestic product (GDP)* prints.
  3. The Fed is finished: The Federal Reserve isn’t really fooling anyone by suggesting rate hikes are still on the table. The December Federal Open Market Committee “dot plot” made it very clear that the Fed expects at least three rate cuts this year. That should feed through into lower bond yields.

Bullish on Equal-Weight Nasdaq? Let the Whole Index Carry its Weight.

Investors who think this year will be about the anti-Mag 7 trade can express the view using the Direxion NASDAQ-100® Equal Weighted Index Shares (Ticker: QQQE), which seeks investment results, before fees and expenses, that track the NASDAQ-100 Equal Weighted Index*. QQQE, which is rebalanced quarterly, aims for a 1% weighting in all Nasdaq-100 stocks. QQQE isn’t a leveraged ETF so it can be thought of as more of a longer-term holding than a trading vehicle.

To view the Fund's full holdings, click here. Holdings are subject to risk and change.

One way of looking at it is that QQQE has an undersized position in the big guys, and oversized positions in the smaller ones. For you political junkies, think of QQQE like the U.S. Senate: Each state gets the same weighting, no matter whether its population is large like New York, or tiny like Hawaii.

2023 was the year of the New Yorks. Could 2024 be the year where you want to buy the Hawaiis instead?

*Definitions and Index Descriptions

The NASDAQ 100® Equal Weighted Index (NETR) is the equal weighted version of the NASDAQ-100 Index® which includes 100 of the largest domestic and international non-financial securities listed on NASDAQ® Stock Market based on market capitalization. Equal weighting is a method of weighting index stocks whereby the same exposure is provided to both the smallest and largest companies included in the Index. The Index is rebalanced quarterly and reconstituted annually. One cannot directly invest in an index.

An investor should carefully consider the Fund’s investment objective, risks, charges, and expenses before investing. The Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain the Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at www.direxion.com. The Fund’s prospectus and summary prospectus should be read carefully before investing.

NASDAQ®, OMX®, NASDAQ OMX®, and NASDAQ 100® Equal WeightedSM Index are registered trademarks and certain trade names and service marks of The NASDAQ OMX Group, Inc. (which with its affiliates is referred to as the “Corporations”) and are licensed for use by Rafferty Asset Management, LLC. The Direxion NASDAQ-100® Equal Weighted Index Shares has not been passed on by the Corporations as to their legality or suitability. The Direxion NASDAQ-100® Equal Weighted Index Shares is not issued, endorsed, sold, or promoted by the Corporations. THE CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE PRODUCT(S).

Direxion Shares Risks – An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and includes risks associated with concentration that results from the Fund’s investments in a limited number of securities. Risks of the Fund include Index Correlation Risk, Index Strategy Risk, Depositary Receipt Risk, Foreign Securities Risk, Cash Transaction Risk, Tax Risk, as well as risks related to the market capitalizations of the securities, and the specific industries or sectors, in which the Fund may invest. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.

Distributor: Foreside Fund Services, LLC.