ETFs
Nvidia Retail Craze Sparks Big Moves in the ETF World
(Bloomberg) — From growing the get-rich-quick scheme to becoming a game-changer for outperformance, Nvidia Corp. (NVDA) the market’s latest roller coaster ride is a telling example of the AI chipmaker’s importance in the $9.2 trillion U.S. ETF complex.
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Nvidia’s meteoric rise has driven a more than 2,000% surge in assets in a product that boosts exposure to the AI darling, turning the ETF into a favorite trading vehicle for retail investors — with trading volumes hitting new highs despite recent reversals. Within the ETF industry as a whole, greater exposure to the stock has been a key factor separating winners from losers. Only 96 of the 2,000 equity ETFs with little or no exposure to Nvidia have managed to outperform the S&P 500 since the company initially broke out as a bellwether for AI last year, according to Bloomberg Intelligence.
It comes at a precarious time for the stock, following a $400 billion rout that raised concerns the AI pioneer was at an inflection point as one-way trades remain historically crowded.
Consider the flood of cash flowing into funds that offer investors twice the daily yield of the tech giant. The GraniteShares 2x Long NVDA Daily ETF (NVDL) saw inflows of approximately $2.7 billion, while a similar product, the T-Rex 2X Long NVIDIA Daily Target ETF (NVDX) – has taken in more than $300 million so far this year, according to data compiled by Bloomberg. NVDL began the year with approximately $220 million in assets, a figure that has grown to more than $5 billion.
In fact, the fund is in such demand that more than $10 billion worth of shares traded in the five sessions through Tuesday. The leveraged product has become a regular fixture among the 15 most-traded ETFs, according to Bloomberg Intelligence’s Eric Balchunas.
Those who don’t own Nvidia have been left behind. Exposure to the AI pioneer has been a “major driver” for the best-performing ETFs, with the top decile having an average weighting of nearly 7% to the chipmaker in data going back to Nvidia’s initial eruption last year, according to BI’s Athanasios Psarofagis. Those in the worst-performing decile had virtually no exposure to the company.
“Over the past 18 months, Nvidia has been a key driver of ETF performance,” he wrote in a note.
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In fact, it was so difficult to outperform the S&P 500 without exposure to Nvidia that an investor looking to outshine the broader market would have had to invest in products that some might consider niche or unconventional, including uranium, crypto, and Polish and Argentinian investments.
Only 96 ETFs, out of a universe of over 2,000, can be considered to have outperformed stocks with no help or very little exposure to Nvidia. The list includes funds focused on digital assets like the VanEck Digital Transformation ETF (DAPP) and the Bitwise Crypto Industry Innovators ETF (BITQ), as well as a few thematic funds focused, among other things, on IPOs, cloud computing and cybersecurity.
Another example of what performance looks like without Nvidia’s help can be found in an AI-powered ETF, whose holdings are analyzed and selected by a quantitative model. The $104 million Amplify AI Powered Equity ETF (AIEQ) — developed by a program that runs on IBM’s Watson platform — counts Microsoft Corp., Applied Materials Inc., Qualcomm Inc. and others among its members, though the company that sparked all the hype is conspicuously absent from its lineup. AIEQ has gained just 1.6% since the start of the year.
“NVDA has participated in AIEQ in the past, including earlier this year, as the AI model included it in the selection process,” said an Amplify spokesperson.
“AIEQ’s AI-driven algorithm overlooked NVDA stock, which has benefited the most from the disruptive technology it uses,” said Jessica Rabe, co-founder of DataTrek Research, adding that she also doesn’t own other AI beneficiaries such as Alphabet Inc. and Broadcom Inc. “It’s odd that an AI-driven ETF wouldn’t favor these AI-related stocks, especially given their momentum this year. Ultimately, this lack of exposure helps explain why AIEQ has so significantly underperformed the S&P and Nasdaq so far this year, given its disproportionate weighting in them.”
—With the help of Isabelle Lee.
(Updates AIEQ performance for 2024; an earlier update added commentary from Amplify.)
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