On this week’s episode of ETF Prime, host Nate Geraci and VettaFi‘s Zeno Mercer discuss the “Magnificent Seven” and how these companies are affected by artificial intelligence. Afterward, Geraci is joined by David Mann, head of ETF Product & Capital Markets at Franklin Templeton, to discuss investor uncertainty in the bond market.
Mag Seven Momentum
To begin, Geraci notes that despite the meteoric rise in performance for Mag Seven stocks and strategies through the year, the mega-cap tech stocks are now in “correction mode”. Addressing how last Monday’s selloff led to the Mag Seven shedding hundreds of billions of dollars in market cap within a single day, Geraci asked Mercer why he believes the Mag Seven has underwent such a steep correction.
Looking broadly, Mercer noted that it made sense why investors had such strong interest in the mega-caps thus far. In particular, he highlights how investors were optimistic about many these companies integrating artificial intelligence into their operations. Additionally, Mercer notes that these companies were largely maintaining significant growth patterns.
Despite some of the attractive features within mega-caps, Mercer noted that these companies do face geopolitical concern. “There’s lots of revenue exposure to China with some of these chips companies,” he added, while noting that the recent GDP numbers may lead to headwinds for these organizations.
Headwinds aside, Mercer added that these companies still remain key players in the growth of artificial intelligence. “We’re kind of in this once in a lifetime — or at least opportunistic — power play of building out these data centers, building out these models, and trying to protect and grow new revenue streams of these large companies,” Mercer asserted.
AI Risks and Rewards
Drilling down on artificial intelligence, Geraci asked Mercer if he believed the “AI Boom” is actually a boom, or if it’s a frenzy that investors got ahead of themselves on. Mercer asserted that “AI is going to have a huge impact across every sub sector, whether it’s manufacturing, or logistics, or healthcare, drug discovery, or personalization of healthcare recommendations.”
Following up, Mercer noted that companies are continuing to pour money into investing in data centers and building their own AI models. However, Mercer noticed that there is notably less clarity when it comes to “who actually makes money off of this.”
In particular, Mercer observed that Magnificent Seven companies such as Microsoft and Meta are making gambits on unique artificial intelligence plans. While these plans may be grandiose, Mercer adds that many unknowns remain in regards to expected results.
Additionally, Mercer mentioned that artificial intelligence still retains concerns from a government regulatory support. As an example, Mercer notes that if a company curates an ethical AI that can improve on work processes, the company will still need to justify the AI to government regulators. In particular, Mercer noted that the European Union has been asserting pressure on the Magnificent Seven in regards to how they operate AI innovation.
Bonds in Focus
To close out this week’s episode, Geraci was joined by David Mann, head of ETF Product and Capital Markets at Franklin Templeton. Highlighting Franklin Templeton’s most used ETFs, Geraci noted that Franklin Templeton’s most popular ETF by assets was the Franklin U.S. Core Bond ETF (FLCB), and asked Mann why he thought the fund was resonating with investors.
In particular, Mann highlighted how FLCB can provide investors with broad treasury exposure, including with investment grade corporates and mortgages. Additionally, Mann touted the fund for its low cost, currently sitting at 15 basis points.
Looking at how investors are calculating their bond risk, Mann noted how much of the uncertainty has focused on how the Federal Reserve handles potential upcoming rate cuts. Should the Federal Reserve be more dovish, Mann asserts “that could be helpful to some more riskier parts of the bond market.” Additionally, this could lead to investors taking on more duration risk in their bond assets. However, if the Federal Reserve behaves more hawkish, then investors could end up promoting a shorter-duration strategy, making it difficult for investors to position their bond exposure for the future.
