Should You Overexpose Yourself To NVDA?

Nvidia (NVDA) crushes all competitors — by a mile — in our Trackstar database of the semiconductor stocks investors have been searching for most across the platforms of our 100+ financial media partners. While it recently crossed the 1,000,000 view mark in Trackstar, NVDA has since pulled back to just above 900,000 views.  

As for Nvidia’s stock price, despite a roughly 10% decline over the last month, NVDA is up nearly 100% over the last six months, about 144% year to date and 159% over the last year. So much for a pull back. 

But what about investor exposure? Or overexposure to NVDA? 

If you own NVDA as an individual stock, there’s a decent chance it makes up a larger percentage of your portfolio than when you first bought it. 

While there’s not necessarily anything inherently wrong with this, definitely keep tabs on the situation. Consider your target allocations — based on sector, the type of stock (volatile tech, blue chip, dividend growth, etc.) and your place in life (i.e., are you nearing retirement, are you decades away from retirement?) — and rebalance accordingly. 

This might mean selling some of your big winners, slowing down the intensity of your buys and/or buying more underrepresented names to get back to your target allocations. It can be tempting to let winners ride. However, there’s a balance to strike between being aggressive/ensuring you don’t leave money on the table and remembering why we want diversification, which goes part and parcel with allocations, in the first place. 

But what if you own NVDA in ETFs?

This can make things a bit more tricky. Which is one reason why The Juice is constantly — and will continue to — look inside ETFs to see not only the stocks they hold, but at what concentration. 

NVDA’s market cap is currently around $2.9 trillion. In March, it hit $2 trillion. So the move up has happened super fast. And this has certainly impacted the exposure some ETFs have to the stock. 

Relevant to this discussion, you need to know about two types of ETFs: ETFs that own stocks based on market cap and those that own stocks in equal proportion (not based on market cap). The Juice wrote about equal-weight ETFs last November, which, as you’ll see is telling in the rear view mirror:

As we note in our SPY and QQQ lovefests, these two ETFs overexpose you to companies with huge market caps. For example, the top ten holdings in SPY make up 32% of the entire ETF, led by Microsoft (MSFT) at 7.4% and Apple (AAPL) at 7.3%, as of November 28, 2023. It’s even more lopsided in the tech-heavy QQQ where the top ten stocks comprise nearly 50% of the fund. The top five alone — Apple, Microsoft, Amazon.com (AMZN), Nvidia (NVDA) and Meta Platforms (META) — account for 35.5% of QQQ’s composition, as of the other day. 

… It’s a stretch to say you’re truly diversified in SPY and QQQ given the aforementioned concentrations, even if these funds rebalance from time to time. 

So, enter equal-weight ETFs.

As the name implies, equal-weight ETFs hold the stocks of whatever index they track in equal proportion. Not based on market cap. So, in SPY, for example, names at the bottom of the list, such as Alaska Air Group (ALK), Hasbro (HAS) and Boston Properties (BXP) have as much of a relative impact on performance as Apple or Microsoft.

Fast forward nearly nine months later and —

• The top ten holdings in SPY comprise 35.0% of the ETF
• The top ten holdings in QQQ still account for 50% of the fund. 
• The five — AAPL, MSFT, NVDA, Broadcom (AVGO) and AMZN — still account for 35% of QQQ. 

Just as individual investors do, indexes (and, subsequently, the passive ETFs that track them) rebalance. This said, you still need to be aware of what’s happening, even in these broad market ETFs in conjunction with your own portfolio. 

In QQQ, NVDA has a 7.72% concentration at the moment. In SPY, it’s 6.39%. 

However, as our friends at WisdomTree point out, six ETFs have a 10% or greater exposure to NVDA, including the VanEck Semiconductor ETF (SMH), which is the only large ETF with a greater than 20% exposure. SMH only owns 25 stocks (all semiconductors) so it makes sense that NVDA is overrepresented. And, for the record, SMH passively tracks a semiconductor index of 25 companies, led by Nvidia. 

Here again, this isn’t good or bad. It depends on your situation, perspective and outlook. 

WisdomTree takes a more conservative approach, maintaining a much lower exposure to NVDA in its funds, particular the ones with an AI focus:

So far, not placing more weight to Nvidia has detracted from relative returns, but we remind investors that the AI story, if it really works, is a 10- to 15-year journey that will not be fully known by the end of 2024 or even in 2025. We expect a lot of topics to come into and fade out of prominence, so we believe in more of a broad-based approach for the coming years. 

The Bottom Line: Ultimately, it’s up to you. The Juice merely wants to put the information in front of you. You might own NVDA on its own and as part of an ETF or two with significant exposures. 

If you’re comfortable here, stay the course. If not, look at ways to rebalance. 

In tomorrow’s Juice, we look at a couple of ETFs that can potentially complement one another inside a well-rounded portfolio. More importantly, they show two different ways to consider portfolio composition in terms of concentrations and style. 

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