ETFs: NVDA vs Diversified. Which Beat Market?
From a humble beginning to becoming a “make-or-break” factor for outperformance, $NVIDIA Corp(NVDA)$ latest market roller coaster is a cautionary tale of the importance of the AI chip-maker in the $9.2 trillion US ETF complex.
Nvidia's stock price skyrocketed more-than +2,000%, making a fund that lets people invest in Nvidia very popular.
Even though Nvidia's price went down recently, people are buying and selling this fund, more than ever before.
Within the ETF industry overall, greater exposure to Nvidia, has been a prime driver in separating winners from losers.
Based on Bloomberg Intelligence, only 96 out of 2,000 equity ETFs with low-to-no exposure to Nvidia have managed to outperform the S&P 500 since Nvidia’s 2023 initial eruption as an AI bellwether.
In the past week, Nvidia's stock price has pulled back a fair bit ($400 billion!), making some investors worried it might not keep going up.
There is concern because many are still heavily invested in Nvidia's success.
ETFs with AI exposure.
Just look at the amount of money rushing into ETFs that promise to double daily gains of tech giant Nvidia, (as compiled by Bloomberg):
$GraniteShares 2x Long NVDA Daily ETF(NVDL)$ has seen inflows of around $2.7 billion. NVDL started the year with around $220 million in assets, a number that has swollen to > $5 billion. (see below)
$T-REX 2X LONG NVIDIA DAILY TARGET ETF(NVDX)$, a similar product has taken > $300 million so far in 2024.
In fact, the fund is so in demand that it’s traded more than $10 billion worth of shares over 5 sessions through Tue, 25 Jun 2024.
According to Bloomberg Intelligence, Eric Balchunas, the leveraged product has become a regular among the top 15 most-traded ETFs.
Those that do not hold Nvidia shares have been left in the dust.
According to Bloomberg Intelligence’s Athanasios Psarofagis,
Having exposure to the AI trend-setter has been a “prime driver” for the best-performing ETFs.
In the past 18 months, Nvidia has been among the main drivers of top ETF performers.
Based on data going back to Nvidia’s initial eruption in 2023, the best-performing ETFs put almost 7% of their money into the chipmaker, while the worst-performing ones barely had any Nvidia at all.
To outperform the S&P 500 Index, without investing in Nvidia will be tough.
Investors who wanted to do better than the market would have to invest in unusual instruments, like uranium, cryptocurrency, or even stocks from Poland and Argentina.
ETFs w/o AI exposure.
On the 96 ETFs that managed to outperform with little or no exposure to Nvidia, the list includes digital-assets-focused funds like:
Some thematic funds centered on IPOs, cloud computing and cybersecurity, among others.
Another example of what performance looks like without a boost from Nvidia can be found within an AI-powered ETF, whose holdings are scanned and chosen by a quantitative model.
It is the $104 million — $Amplify AI Powered Equity ETF (AIEQ).
Developed by a program that runs on IBM’s Watson Platform.
Counts (a) Microsoft Corp., (b) Applied Materials Inc., (c) Qualcomm Inc. and others among its members.
Although the company (Nvidia) that sparked the whole AI craze is conspicuously missing from its lineup.
As a result of such holdings, AIEQ has gained just +1.6% YTD.
Spokesman for Amplify EFT has said - “NVDA has been in AIEQ in the past, including earlier this year (2024) as the AI model included it in the selection process”.
DataTrek Research, Co-founder - Ms Jessica Rabe has following comments:
AIEQ’s AI-powered algorithm has overlooked NVDA, that benefited most from the disruptive technology it employs.
AIEQ also does not own other AI beneficiaries such as Alphabet Inc. and Broadcom Inc.
It’s odd that an AI-driven ETF does not favor these AI-related stocks, especially given their momentum this year.
Ultimately, the lack of exposure explained AIEQ dismal underperformance against both the S&P and Nasdaq year to date given their outsize weightings in these names.
My viewpoints: (mine only)
Although above passage seems to highlight the gains to be had for ETFs with Nvidia exposure, I like to believed that there is more than meets the eye.
Below are some strategies, as investors, we can learn - when it comes to ETF investment.
(1) Targeted Exposure.
Focus on ETFs with high exposure to surging sectors like AI, exemplified by the outperformance of Nvidia-heavy ETFs.
In short, homework, homework, homework - we need to be “interested” enough to know what is trending and what is bubbling beneath the surface and get into action before it blast off.
(2) Diversify.
Even for ETFs, consider ETFs with broader diversification to manage risk, as shown by the few non-Nvidia ETFs that beat the S&P 500.
Still the same old adage - “do not put all eggs in one basket”.
(3) Thematic Strategies.
Look for thematic ETFs focused on complementing trends like cloud computing, data centres or cybersecurity, which can benefit alongside sectors like AI.
(4) Cautious Leverage.
Leverage (e.g., 2x daily ETFs) can amplify gains but also magnify losses, as seen with NVDL and NVDX. Meaning when it comes to ETF investment, as investors we still need to keep abreast with what are the happenings in equities market.
(4) Question AI-Driven Selection.
Be mindful of potential biases in AI-powered ETF selection, like AIEQ's underperformance despite focusing on AI.
In short, homework, homework, homework - we should be “interested enough” to know what is/are in the ETF Holdings, to “determine” whether the funds is holding “correct” stocks in its portfolio.
This is “especially warranted” if investors are pouring monies into ARK funds managed by Ms Cathie Wood. She has a knack for “impulsive” buying “cheap and volatile nature” stocks and then pray that the stocks will rise in price.
Gone were the days where one could buy the ETF/s and forget-about-it and watch it grows ! Now it is about knowing what to buy, when to buy and when to get out (important).
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