Nvidia Corp. (NVDA), the $1.96 trillion chipmaker, continued riding the artificial intelligence wave, nearly tripling its year-over-year revenue while beating analysts’ profit expectations and lifting an entire category of exchange-traded funds.
Nvidia shares jumped to a record, adding $110.66, or 16%, to close at $785.38. The shares have more than tripled over the past year.
According to etf.com data, 484 exchange-traded funds hold Nvidia and most of them jumped today. The biggest holder is Vanguard Total Stock Market ETF (VTI), with a $36.5 billion stake. That fund moved 1.5%. The VanEck Semiconductor ETF (SMH), which has 25% of its assets in the stock, rose 6.7%. The biggest allocation belongs to the leveraged T-Rex 2X Long NVIDIA Daily Target ETF (NVDX), which, aiming to double the return on Nvidia shares, jumped 30% today.
The Santa Clara, California-based company’s earnings report last night was widely anticipated by investors and the company didn’t disappoint, beating top and bottom-line estimates in and boosting its future expectations for profit and revenue.
NVDA, Tech Stocks Face High Hurdles
It’s not an overstatement to say that the near-term direction of the stock market, especially tech-heavy exchange-traded funds, will continue to be significantly impacted by Nvidia, the world’s leading artificial intelligence company.
Adding to the drama, growth stocks, which are under closer investor scrutiny for their high valuations, and are more interest rate-sensitive than their value stock counterparts, face larger hurdles in 2024 than in 2023. Today, NVDA and other mega-cap growth stocks face the “higher for longer” Fed rate expectations following a hotter-than-expected January CPI report, as well as the S&P 500 recently crossing the 5,000 level for the first time in its history.
High expectations were met for the Mag 7 tech stock, which had beaten earnings estimates in 19 of the last 20 quarters, according to Nasdaq.
AI, Tech and Mag 7 ETFs Have Largest Exposure to NVDA
The ETFs that will be impacted the most following the Nvidia earnings call are funds with the heaviest exposure to NVDA, most notably the VanEck Semiconductor ETF (SMH) at nearly 25% allocation weight, and the Global X Robotics and Artificial Intelligence ETF (BOTZ) at 20%.
Over the past year, SMH has jumped 67% in price while BOTZ is up 27%, as of Feb. 16, 2024, with the lions’ share of those gains being attributed to NVDA’s gain of over 200% in this 12-month period. A less-than-stellar earnings report from Nvidia this week would place downside pressure on these ETFs and an earnings miss would likely push these funds sharply lower.
Measuring NVDA Impact: Cap-Weight vs Equal-Weight
To demonstrate the NVDA impact on ETFs, compare the 1-year gain of 25% for the cap-weighted SPDR S&P 500 ETF Trust (SPY) to the 8% gain for the Invesco S&P 500 Equal Weight ETF (RSP), which gives the same allocation to each of the index’s constituents. The cap-weighted Invesco QQQ Trust (QQQ), which allocates roughly 40% of its portfolio to NVDA and other Magnificent 7 stocks, is up 44% over the past year.
In other words, high exposure to the NVDA-led Mag 7 translated to much higher returns over the past year, but if you reduce exposure to NVDA and the other Mag 7 stocks, your return declines by two-thirds or more.
As markets progress through 2024, broad market indexes like the S&P 500 index, and especially AI ETFs and the broader technology sector, will likely need Nvidia and the other Magnificent 7 stocks to continue to exceed investor expectations to maintain stocks wider bull run. These stocks and ETFs will also need a helping hand from an economic soft landing, which would combine lower inflation and slower but modest growth in the U.S. economy.
