SMH and Nvidia ETFs snap losing streak

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Nvidia stock led the market and Tuesday’s price action was no exception, as NVDA surged nearly 7%, ending a rare losing streak for the semiconductor giant and exchange-traded funds that hold it.

The largest ETF with one of the highest allocations to Nvidia shares, the VanEck Semiconductor ETF (SMH)followed NVDA with a gain of more than 2%.

THE Technology Sector Selector SPDR ETF (XLK)which rebalanced its holdings on Friday to put NVDA in first position, was also up in Tuesday’s trading.

Prior to the surge, Nvidia had fallen more than 15% from its June 18 all-time high, dragging broader stock indexes, including the S&P 500, down with it. The S&P 500 and the tech-focused Nasdaq, rose 0.4% and 1.3% respectively on Tuesday.

Is the market overexposed to Nvidia stock?

Here is a breakdown of the NVIDIA (NVDA)The company’s rise to its $3 trillion market cap, how its size is increasingly influencing the market, and the potential associated downsides:

• High weighting: Nvidia’s stock price has risen significantly in recent years, giving it a high weighting in major indexes like the S&P 500 and Nasdaq 100. This means that the performance of these indexes, and therefore the ETFs that track them , is heavily influenced by fluctuations in Nvidia’s stock price.

• Concentration risk: A large weighting in a single stock can increase the concentrated risk within an index. If Nvidia’s stock price falls, it could cause the overall value of the index to decline more than average.

• Limited diversification: Overexposure to one sector (technology in this case) can limit the diversification benefits of index investing. Ideally, an index should be spread across different sectors to mitigate risks.

Conclusion on Nvidia’s high weighting in ETFs

Nvidia’s heavy weighting in many market index funds and Technology sector ETF simply reflects Nvidia’s current market capitalization, a measure of its relative size and importance in the market.

This is a potential drawback for ETFs that track a market-cap-weighted index, and investors should remain aware of the benefits and risks associated with this heavy weighting.

Although Nvidia’s stratospheric rise has brought many stock ETFs with it, the stock’s eventual decline could have an even greater influence on the downside, as its position in many index funds is now higher than when it started of the rise of Nvidia.

Overall, the debate over Nvidia’s outsized market influence highlights the ongoing debate over index composition and potential concentration risks. It is important to remember that diversification is a key principle of investing and some investors may choose to actively manage their portfolios to reduce their dependence on a single stock, even within a fund index.

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