SMH, Nvidia Stock ETFs Break Losing Streak

Nvidia stock has been driving market direction and Tuesday’s price action was no exception, as NVDA jumped nearly 7%, breaking a rare losing streak for the semiconductor giant and the exchange-traded funds that hold it. 

The largest ETF with one of the highest allocations to Nvidia stock, the VanEck Semiconductor ETF (SMH), followed NVDA with a gain of more than 2%. 

The Technology Select Sector SPDR ETF (XLK), which rebalanced its holdings Friday to move NVDA into the top position, was also higher in Tuesday trading. 

Before the move higher, Nvidia had fallen more than 15% from its June 18 all-time high, pulling down the broader market indexes, including the S&P 500, along with it. The S&P 500 and tech-focused Nasdaq rose 0.4% and 1.3% on Tuesday, respectively. 

Is the Market Overexposed to Nvidia Stock? 

Here's a breakdown of the Nvidia (NVDA)’s rise to its $3 trillion market cap, how its size increasingly influences the market, and the associated potential drawbacks: 

• High weighting: Nvidia's stock price has grown significantly in recent years, leading to a high weighting in major indexes like the S&P 500 and the Nasdaq 100. This means the performance of these indexes, and thus the ETFs that track them, is heavily influenced by Nvidia's stock price fluctuations. 
• Concentration risk: A large weighting of a single stock can increase the concentrated risk within an index. If Nvidia's stock price falls, it could cause a larger-than-average decline in the overall index value. 
• Limited diversification: Overexposure to one sector (technology in this case) can limit the diversification benefits of index investing. Ideally, an index should be spread across various sectors to mitigate risk. 

Bottom Line on Nvidia’s High Weighting in ETFs

Nvidia’s high weighting in many broad market index funds and tech sector ETFs simply reflects Nvidia's current market capitalization, a measure of its relative size and importance in the market.  

This is a potential drawback for ETFs that track a cap-weighted index, and investors should remain aware of the associated benefits and risks of this heavy weighting.  

While Nvidia’s stratospheric rise has lifted many stock ETFs along with it, the stock’s eventual decline may have even greater influence on the downside, as its position in many index-based funds is higher now than at the beginning of Nvidia’s ascent.  

Overall, the debate over Nvidia’s outsized influence on the market highlights the ongoing discussion about index composition and potential risks of concentration. It's important to remember that diversification is a key principle of investing, and that some investors might choose to actively manage their portfolios to reduce reliance on any single stock, even within an index fund.