Investor Essentials Daily

The market is attempting to rewrite history

March 25, 2024

The market’s enthusiasm for Nvidia (NVDA) has culminated in the creation of a unique, levered-long Nvidia ETF named NVDL, focusing solely on Nvidia’s stock performance with 2x leverage. 

This phenomenon mirrors the excessive concentration warning signs of the late 1990s tech bubble. 

The current market sees a similar concentration, with the top 10 S&P 500 stocks, including Nvidia, making up 32% of the index’s weight. 

This has led to narratives about a “winner takes all” market. 

However, despite today’s tech giants being fundamentally strong and profitable, the rapid rise of single-stock ETFs like NVDL, now surpassing $1 billion in assets, signals potential market imbalance and volatility. 

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The tech frenzy surrounding Nvidia (NVDA) has reached new heights, with the launch of an exclusive Nvidia ETF, known as NVDL.

You read that right. There is a one-stock, levered-long Nvidia ETF, called NVDL.

NVDL offers investors nothing beyond the performance of a single stock, that is with 2x leverage.

The ETF has been around for a little over a year, it highlights a warning straight out of the 1999-2000 tech bubble.

During the tech bubble, one of the big warning signs the market was getting out of hand in the final innings of the rally was how concentrated it was getting.

At the peak of the tech bubble, 25% of the S&P 500 market cap was in just 10 stocks. This wild level of concentration showed that everyone was making a homogeneous bet for the future.

Last year we comfortably surpassed the tech bubble’s level of concentration.

The weighting of the top 10 stocks in the S&P 500 was at 32% by the fourth quarter and has continued to rise since. The Magnificent Seven (“M7”) stocks now account for 29% of this weight by themselves.

When this happens, you hear narratives about a “winner takes all market.” You hear how Nvidia will power all AI, and Microsoft (MSFT), Alphabet (GOOGL), and Amazon (AMZN) will be the platforms on which all AI is built.

While presumptuous, some of these headlines actually don’t seem too unreasonable.

Unlike the tech companies of the early and late 90s, today’s market is supported by true fundamentals. The M7 companies are cash-rich, highly profitable, and are reinvesting shrewdly in their operations.

However, good things do not always last. And, things can unravel quickly. In fact, passive vehicles like the new Nvidia ETF could contribute to this very idea.

In March, NVDL became the largest single-stock ETF in the world, surpassing $1 billion in assets under management. The ETF has been such a hit, that the demand for more single-stock ETFs has skyrocketed.

And for investors, this hasn’t seemed to be enough. GraniteShares, the ETF provider who brought us NVDL, has since expanded their offerings to bring the leverage of their other single-stock ETFs to 200% as well.

If left alone, the S&P 500 could find itself becoming even more lopsided, and despite being built atop thriving businesses, the market could see the chariot swing out ahead of the horse.

In the U.S., business is centered around creative destruction. And when this is the case, inflated narratives never last. Instead, it’s always small companies you never expect that end up as the bigger winners.

The market seems to think the music won’t ever come to a stop for today’s champions.

So be cautious putting all your eggs in that basket, and assuming that smaller companies in different industries won’t end up taking the cake.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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