Allan Roth: Does Nvidia Jump Expose Passive Pitfall?

Allan Roth: Does Nvidia Jump Expose Passive Pitfall?

Has XLK underpeformed the tech sector due to relatively light NVDA weighting?

Reviewed by: Staff
Edited by: Ron Day

A recent article claimed to illustrate a large flaw in passive investing. The article in Yahoo Finance was titled "Nvidia’s surge reveals a pitfall of passive investing." I reached out to the author, Jared Blikre, via LinkedIn but did not hear back.

His argument centered around the $69 billion Technology Select Sector SPDR Fund (XLK). It’s one of the 11 SPDR sector funds and, of course, technology has been the hottest sector. The fund’s objective is to follow the S&P Technology Select Index which currently has 67 constituents.  

Blikre argues that XLK has actually significantly underperformed the technology sector this year. That’s in contrast to State Street which claims May YTD performance of 9.37% is only four bps below the benchmark, which can be accounted for in XLK’s 0.09% annual expense ratio.  

Morningstar seems to support Blikre’s argument of underperformance. As of June 26, it shows the total YTD return of 18%, significantly lagging their benchmark Morningstar US Tech TR USD index by 8.01 percentage points. What gives?

NVDA Weighting in XLK

The article, written on June 20, noted that Nvidia (NVDA) was extremely underweighted relative to its market capitalization but that this would change significantly the following day. Specifically, he calculated the following changes would occur the next day on June 21 on its largest four holdings.

CompanyTickerCurrent WeightRebalanced Weight


Nvidia had been weighted at only 5.9% of the portfolio while its actual market capitalization was 21%. So it barely got a quarter of Nvidia’s incredible 164% YTD return through June 20. On June 21, XLK sold most of its Apple stock to load up on Nvidia.

It turns out that the SPDR index has rules that limit the top holdings to no more than 50% of the ETF’s value. Buried on page 118 of the prospectus is the following:

Index Concentration. In order to qualify for the favorable tax treatment generally available to RICs, a Fund must satisfy certain diversification requirements. In particular, a Fund generally may not acquire a security if, as a result of the acquisition, more than 50% of the value of the Fund’s assets would be invested in (a) issuers in which the Fund has, in each case, invested more than 5% of the Fund’s assets and (b) issuers more than 10% of whose outstanding voting securities are owned by the Fund.

Because, as of June 20, Nvidia had a greater market capitalization than Apple, the fund had to sell over 75% of its Apple stock and buy nearly three times the amount of Nvidia stock Since the allocation change, as of June 28, Apple is up 0.4% while Nvidia is down 5.5%. Unfortunate market timing.

A Closer Look at the Article and Claim

First, I give a lot of credit to Blikre for this finding. I learned something I didn’t know. XLK was clearly unlucky, but does this really reveal a pitfall in passive investing?  

I argue buying XLK is active in three ways:

It’s picking a sector to outperform the overall stock market. I recently wrote that sector ETFs were active and noted Morningstar’s research showing investors in sector funds chased performance and underperformed the sector by 4.38 percentage points annually over the ten years ending December 31, 2022.  

Passive investing means buying and holding rather than trading. It uses using market cap weighting. Dumping billions of dollars of Apple to buy billions of dollars of Nvidia and still varying greatly from market cap weighting is very active.

XLK is limited to just the technology companies that are also in the S&P 500. It doesn’t include smaller companies. It holds only 67 companies while the Morningstar US Tech TR USD index holds 221 companies, all market capitalization weighted Even a fund following this index is active since it’s picking a sector.  

My conclusion is that Blikre has actually provided even more support for the pitfalls of active investing. A total stock index fund like the Vanguard Total Stock Market ETF (VTI) or the iShares Core S&P Total U.S. Stock Market ETF (ITOT) isn’t picking sectors, trading stocks, and holds as close as possible to every company in every sector according to market capitalization. That’s passive investing unless you trade.

Allan Roth is founder of Wealth Logic, an hourly based financial planning and investment advisory firm. He also benchmarks portfolio performance for foundations and other business concerns. Roth's website is You can reach him at [email protected] or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter