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(Bloomberg) — Nvidia Inc.’s (NVDA) recent market roller coaster, from a growing get-rich-quick scheme to a driver of outperformance, is a cautionary tale about the importance of the AI chipmaker to a $9.2 trillion U.S. ETF complex.
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Nvidia’s rapid growth has caused the product’s assets to soar more than 2,000%, boosting exposure to the AI darling and making the ETF a favorite trading vehicle for retail investors, with trading volumes hitting record highs despite a recent reversal.Across the ETF industry, increased exposure to the stock is a key factor separating winners from losers: Of 2,000 stock ETFs with little or no exposure to Nvidia, only 96 have outperformed the S&P 500 since the company first exploded in popularity as an AI pioneer last year, according to Bloomberg Intelligence.
This comes at a volatile time for the company’s shares following a $400 billion sell-off that raised concerns that the AI pioneer is at a turning point while one-sided momentum trading remains historically crowded.
Consider the deluge of money flowing into funds that offer investors double the daily returns of the tech giants. The GraniteShares 2x Long NVDA Daily ETF (NVDL) has seen inflows of about $2.7 billion, while a similar product, the T-Rex 2X Long NVIDIA Daily Target ETF (NVDX), has seen inflows of more than $300 million so far this year, according to data compiled by Bloomberg. NVDL had about $220 million in assets at the start of the year, but that figure has ballooned to more than $5 billion.
Demand for the fund has been so strong, in fact, that more than $10 billion in shares changed hands in five sessions through Tuesday, and the leveraged product consistently ranks among the top 15 most-traded ETFs, according to Bloomberg Intelligence’s Eric Balchunas.
Companies without Nvidia are being left behind. Exposure to the AI trendsetter has been a “key driver” of the best-performing ETFs, and going back to Nvidia’s first explosive stock sell-off last year, the top 10% of ETFs have an average weighting of about 7% to the chipmaker, according to BI’s Athanasios Psarofagis. The worst-performing 10% of ETFs had almost no exposure to the company.
“NVIDIA has been one of the ETF’s key performance drivers over the past 18 months,” he wrote in a note.
Indeed, it would be very hard to outperform the S&P 500 without investing in Nvidia, and investors looking to get an edge on the broader market would have had to invest in products considered niche or non-traditional, such as uranium, cryptocurrency, or even investments in Poland or Argentina.
Of more than 2,000 ETFs, only 96 can be credited with outperforming stocks without any backing or minimal exposure to Nvidia. The list includes digital asset-focused funds such as the VanEck Digital Transformation ETF (DAPP) and the Bitwise Crypto Industry Innovators ETF (BITQ), as well as thematic funds focused on IPOs, cloud computing, cybersecurity and more.
Another example of what performance looks like without Nvidia’s help: AI-powered ETFs, whose holdings are scanned and selected by quantitative models. Developed by a program running on IBM’s Watson platform, the $104 million Amplify AI-Powered Equities ETF (AIEQ) includes Microsoft, Applied Materials and Qualcomm, but notably absent from the lineup are the companies that sparked the boom. AIEQ is up just 1.6% so far this year.
“NVDA has been included in AIEQ in the past, and earlier this year the AI model included NVDA in the selection process,” an Amplify spokesperson said.
“AIEQ’s AI-powered algorithm misses out on the stock that benefits most from the disruptive technology it employs: NVDA,” said Jessica Rabe, co-founder of DataTrek Research, adding that it also doesn’t hold other companies that have benefited from AI, such as Alphabet and Broadcom. “It’s odd that an AI-driven ETF doesn’t favor these AI-related stocks, especially given their momentum this year. After all, this lack of exposure helps explain why AIEQ has significantly underperformed both the S&P and Nasdaq so far this year, despite its overweight to these stocks.”
—With assistance from Isabelle Lee.
(Updates AIEQ’s 2024 performance; previous update adds comment from Amplify.)
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