What the Nvidia Debacle Means for ETFs

Pride goeth before destruction.

Nvidia, the chip manufacturer and AI software company that only a week ago was the most valued company in the world, saw its stock slide an additional 6% on Tuesday after falling 4% on Monday in the wake of a scandal involving its CEO, Jensen Huang. Huang admitted to an affair with Alice Huang (no relation), reportedly suspected by US security officials of being a Chinese spy who helped facilitate billions in sales in the company’s chips. Now, investors are feeling the consequences of the firm’s plummeting reputation and value, both in terms of the AI sector — which was already experiencing selloffs following the midterm elections — but also in the broader S&P 500.

“A prolonged decline in Nvidia could weigh on SPY, VOO and IVV, where the stock accounts for roughly 7% to 8% of [their] weight,” said Roxanna Islam, head of sector and industry research at VettaFi. “However, these diversified ETFs should be better protected from company-specific risks than investors holding Nvidia directly.”

Red With Envy-dia

Part of the danger stems from Nvidia’s outsized position in market-cap weighted equity and tech ETFs. Nvidia is a top holding in many of these funds, and while some products offer diversification in the form of exposure to sectors like energy or industrials, a heavy concentration in Nvidia and other megacap technology stocks can leave them vulnerable amid a broader downturn in the AI trade. The impact has been most pronounced in leveraged single-stock Nvidia ETFs — the GraniteShares 2x Long NVDA Daily ETF (NVDL) was down 11% Tuesday and 46% over a month — but several semiconductor funds also have an outsized exposure to Nvidia, making them sensitive to the stock’s decline.

According to recent data from Yahoo Finance as of market close on Tuesday:

• The largest semiconductor ETF in the US, the VanEck Semiconductor ETF (SMH), was down 5.5% over five days and 18% over a month.
• The iShares Semiconductor ETF (SOXX), the second largest, fell 4% over five days and 19% over a month.
• The Roundhill Memory ETF (DRAM), which made headlines earlier this year for being the fastest-growing fund in history, recently saw  half of its assets exit, and its price fell 12% over five days and 26% over a month.

Dip It Low: While Nvidia’s performance is tied to the wider AI and tech sector, there can be significant differences among companies, as investors seek other chip manufacturing options. The stock of Advanced Micro Devices, for example, rose nearly 6% over five days as of Tuesday while being down 13% over a month. Investors seem to be buying the dip in both semiconductor funds and some leveraged products, said Steve Foy, senior vice president of investments at Tidal Financial. “If I look at the leveraged space … that’s an area where you tend to see dip-buying in a really big way,” Foy said. “It goes without saying that the volume picks up.”