Managing Nvidia exposure

For anyone that doesn't know, NVIDIA is the leading provider of graphics processing units (GPUs) that are used in a wide range of applications, including Artificial Intelligence (AI). With the growing demand for deep learning technology, NVIDIA has been well-positioned to benefit from the rise of AI given that it commands an 80% share of the artificial intelligence chip market.

The chart below shows just how meteoric the rise in Nvidia's share price has been since late 2022, when ChatGPT, the first AI chatbot, was first unleashed upon the world.

In 2024 alone, Nvidia's share price has risen 163%, which even takes into account the recent setback that I wrote about in last week's newsletter titled the Nvidia conundrum. In fact, according to research published by Morningstar, during the second quarter of 2024 only 10 companies fuelled the 4.3% rise in the S&P 500 while the other 490 companies declined in aggregate. But of the 10 companies which helped lift the S&P 500, Nvidia was one of the biggest contributors. Furthermore, Nvidia's correlation to the wider S&P 500 fell, meaning that those investors who outperformed their peers and the wider market had to be invested in Nvidia. The greater their exposure the greater their outperformance.

Interestingly, as mentioned in my most recent newsletter, the last two weeks have been turbulent for Nvidia. After surpassing Microsoft in market capitalisation, Nvidia's share price then fell nearly 15% in a matter of days, exceeding the 10% fall which defines a technical correction. Even as I write this article the share price remains almost 10% below its June high. Yet despite the slump in Nvidia's share price, the wider US stock market remained undeterred, providing another example of Nvidia's weakening correlation with the wider market.

While some investors are seeing this as a sign of Nvidia's strength and the potential revolutionary impact of artificial intelligence, others believe it highlights that AI and Nvidia are in a bubble, which will inevitably pop.

Parallels have been drawn with the fortunes of Cisco Systems in the late 1990s when its share price soared off the back of enthusiasm for the development of telecommunication networks that could cope with projected internet traffic demands. In the process, the company's market cap also overtook Microsoft's. But ultimately it was something of a false dawn as Cisco's share price slumped. To this day the share price remains below the heady heights achieved more than 20 years ago. The concern from some investors is that perhaps we could see the same happen to Nvidia if the adoption of AI doesn't live up to the hype. But of course, there is the alternative viewpoint that Nvidia's share price still has much further to go. Even if a bubble is forming in Nvidia and other AI stocks, the eventual bursting could be years away.

Nvidia's meteoric rise means that the company's fortunes are having an increasing influence on investors' portfolio returns. That's because Nvidia now accounts for 7% of the S&P 500, which is a cap-weighted index. So if you are a passive investor, in particular, investing in an S&P 500 tracker then the fate of Nvidia matters.

Often such meteoric rises are seen in fringe assets, such as bitcoin or meme stocks. It's unusual to see such moves in the largest publicly traded company in the world. As a result investors face a choice, they can ride the AI theme by default or they could choose to actively manage their exposure, either increasing or decreasing their exposure to Nvidia depending on their viewpoint.

Of course if an investor wants to increase their Nvidia exposure they could directly invest in the shares of the company. That obviously carries increased investment risk and goes beyond the scope of 80-20 Investor.

Another option is to opt for an ETF with significant exposure to Nvidia. If they were to go down that route then there are a number of ETFs that track the global semiconductor sector which have exposure to Nvidia of around 25-30% of the ETF's assets. That is more than 4 times the exposure within the S&P 500 and associated trackers.

Similarly a quick search for ETFs that track the MSCI World Information Technology sector will lead to ETFs that have somewhere between 17-19% exposure to Nvidia.

But what about if you don't want to invest in such a focused way? You may want to invest in a North American equity fund or a Global equity fund that has less exposure (or no exposure) to Nvidia compared to its peers, in order to manage your risks. Conversely you might want a diversified fund from one of the mentioned sectors that has a greater exposure to Nvidia than other funds within the same sector.

For reference the table below provides useful benchmarks for the typical Nvidia exposure of global equity funds and North American equity funds

Investment	Nvidia exposure
S&P 500 ETF	7.01%
MSCI All Country World Index ETF	3.78%
Global equity unit trust	4.2%*
North American equity unit trust	6.1%*

*these figures are the average exposure of those funds that actually invest in Nvidia

So as a starting point, if you want to have a greater or lower exposure to Nvidia when choosing either a global equity fund or North American equity fund (be it an ETF, unit trust or even investment trusts) then the above table is a useful benchmark.

However to help give further clarity the second table below (click to download) lists all the unit trust and investment trusts with at least 1% exposure or more to Nvidia. In order to produce this table I analysed thousands of unit trusts and investment trusts across all sectors. I then colour-coded the table as shown by the key below. I have also listed the approximate allocation for the funds with the highest exposure to Nvidia.

So the table can be used to find a fund within a chosen sector (particularly the Global and North American sectors) that is likely to be overweight or underweight Nvidia versus its peer group. Obviously if a fund you are looking for is not listed in the table then Nvidia is likely to count for less than 1% of the fund's assets. Where the sector name is preceded by "UT" that means it is a unit trust sector, where it is preceded by "IT" that means it is an investment trust sector.

Buy Nvidia at a discount?

With some of the funds with the highest Nvidia exposure being investment trusts it opens up the possibility of being able to buy Nvidia at a discount. That's because when you invest in an investment trust you buy shares. The price of these shares can fluctuate just like any other listed share due to supply/demand from investors. This means you could end up paying less than the value of assets the share represents (a discount) or you could pay more than the underlying assets are worth (a premium).

M&L Capital Management Ltd Manchester & London IT plc, which currently trades at a 14.5% discount to its net asset value, has the largest Nvidia exposure at 32.3%. So on paper, it appears that such a concentrated trust offers the potential to gain exposure to Nvidia (plus a few other stock holdings) at a discount . But of course when buying any trust at a discount you run the risk that the discount could widen, especially if investors lose confidence in the management.