Nvidia Correction Helps Advisors Talk Diversification

As FOMO takes a vacation, a time for meaningful advice emerges.

Reviewed by: etf.com Staff
Edited by: James Rubin

If you are an advisor, perhaps you’ve heard of a “little” $2 trillion computer graphics company that is changing the world. I’m talking, of course, of Nvidia and its recent rise from solid operator to king of the global stock market. 

That’s what a price move from $110 a share to over $970 in about 18 months for a company that was already a large cap will do, especially in the age where stocks can become almost like superheroes or entertainment icons to investors.  

For financial advisors, however, when a stock captures the public’s imagination like Nvidia has recently, or Apple and others have done in the past, the temptation is for investors to ignore diversification and take on the persona of a casino gambler. Let it ride!  

But the ride is often bumpy, or worse. So Nvidia’s rise from roughly $950 to $830 a share in about two weeks’ time is the latest reminder that while the market can put any price on a stock, even the giants of the equity market could use what so many superheroes benefit from: a sidekick!  

Apple: Case in Point  

In this case, that can come in the form of advisors using ETFs to have clients own a chunk of their favorites, while supplementing it with diversification in the form of other holdings, either in similar fields or as a step toward spreading the risk. The stock market has been a friendly place to holders of some of the biggest stocks, especially in the technology sector. But advisors only must return to late December to show that Apple Inc. stock fell 15% from where it stood then.  

Perhaps more significantly, highlighting that stocks are not a one-way ticket to paradise helps advisors bust an important myth, which less-experienced investors with shorter memories are likely to miss. For instance, that dip of the Apple had it sitting at the same price per share last Friday that it stood on Christmas Eve…of 2021!  

Yet during that same period, the $65 billion SPDR Select Sector Technology ETF (XLK), of which Apple has been roughly a 20% weighting over the past few years, gained 18%. Diversification doesn’t always produce the best short-term returns, but it tends to smooth out the rocky roads that the stock market is famous for. 

Nvidia and Diversification?

Nvidia is also part of XLK, but it currently occupies less than 5% of the assets of that ETF. But there are other funds which “feature” a large portion of Nvidia, but with plenty of cushion around it. One is the $3.6 billion Van Eck Semiconductor ETF (SMH), which has been around since 2000. Nvidia currently has a nearly 25% weighting in it. So as XLK is to Apple, SMH appears to be to Nvidia. 

Given that Nvidia is the confirmed world leader (for now) in Artificial Intelligence, it makes sense that the $490 million Global X Robotic & Artificial Intelligence ETF (BOTZ) would carry a high allocation to the stock. Indeed, it checks in at 20% of BOTZ as of last week. 

These brief examples are intended to help advisors bring home a key point to clients, not only about the flexibility and usefulness of ETFs as a portfolio construction tool, but also about diversification in a time of “super stocks.”  

Too much of a good thing can be hazardous to one’s wealth. And with advisors earning much of their income based on the size of client portfolios, doing what they can to prevent maximum losses, if and when superheroes fall, makes a lot of sense for them as well. 

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.