Nvidia has been a phenomenal long-term investment, with shares surging 2,630% during the last five years. Yet, several hedge fund managers (whose investing bona fides include billion-dollar net worths) trimmed their positions in Nvidia during the first quarter, while reallocating funds to the Invesco QQQ Trust (QQQ 1.50%), a supercharged index fund that tracks the Nasdaq-100.
- Steven Cohen of Point72 Asset Management sold 304,505 shares of Nvidia, reducing his stake by 55%. Meanwhile, he started a small position in the Invesco QQQ Trust.
- Ken Griffin of Citadel Advisors sold 2.4 million shares of Nvidia, reducing his stake by 68%. And he increased his stake in the Invesco QQQ Trust by 74%, though it still ranks as a relatively small position.
- Steven Schonfeld at Schonfeld Strategic Advisors sold 96,793 shares of Nvidia, reducing his stake by 58%, while increasing his stake in the Invesco QQQ Trust by 1,584%, making it his fifth-largest position, excluding options.
Cohen, Griffin, and Schonfeld ranked among the most successful hedge fund managers during the first half of 2024, according to Business Insider. But readers should not interpret their trades to mean Nvidia is a bad investment. All three billionaires still own shares of the semiconductor company, which suggests some degree of confidence.
Instead, the lesson here deals with portfolio diversification. Grand View Research estimates artificial intelligence (AI) spending will approach $2 trillion by 2030, and analysts at Swiss investment bank UBS believe "AI will be the most profound innovation and one of the largest investment opportunities in human history."
Nvidia will not be the only winner as that opportunity unfolds; it might not even be one of the biggest winners. In that context, the Invesco QQQ Trust warrants consideration because it offers an easy way to build a diversified portfolio of AI stocks.
NASDAQ: QQQ
Key Data Points
The Invesco QQQ Trust is heavily weighted to information technology stocks
The Invesco QQQ Trust measures the performance of the Nasdaq-100 index, which itself tracks the 100 largest stocks listed on the Nasdaq Stock Exchange. The Invesco QQQ Trust is a growth-focused index fund heavily weighted toward the information technology sector. The 10 largest holdings are listed by weight below:
- Apple: 9.1%
- Microsoft: 8.3%
- Nvidia: 7.2%
- Alphabet: 5.2%
- Meta Platforms: 4.9%
- Broadcom: 4.8%
- Amazon: 4.8%
- Costco Wholesale: 2.7%
- Tesla: 2.7%
- Netflix: 1.9%
Several companies listed above are well positioned to monetize AI, albeit in different ways:
- Apple is one of the largest smartphone and personal computer manufacturers in the world. The company will release a suite of AI features called Apple Intelligence this fall. Morgan Stanley analysts recently made it a top pick based on their assumption that Apple Intelligence will drive record device upgrades through 2026.
- Microsoft is the largest software vendor and operates the second-largest public cloud. The company has emerged as an early leader in generative AI. Nearly 60% of Fortune 500 companies use one of its generative AI Copilots, and more than 65% use its cloud AI services.
- Nvidia is the market leader in data center graphics processing units (GPUs), chips that excel at accelerating complex workloads like AI. "Nvidia's chips underpin all of the most advanced AI systems, giving the company a market share estimated at more than 80%," according to The Wall Street Journal.
- Alphabet is the largest digital advertiser and operates the third-largest public cloud. The company is widely recognized as an authority in AI; Forrester Research recently recognized its leadership in AI infrastructure solutions and large language models.
- Meta Platforms owns Facebook and Instagram, two of the three largest social media platforms as measured by monthly active users. The company is investing in AI to improve engagement and ad relevance. Deepak Mathivanan at Wolfe Research believes those investments could have a significant effect on its financials in the medium term.
- Broadcom is the market leader in application-specific integrated circuits, custom chips designed for specialized use cases like AI. Goldman Sachs analysts recently wrote, "Alongside Nvidia, we view Broadcom as a critical piece to the ongoing AI infrastructure build-out."
- Amazon operates the largest public cloud in the world, and market share gains in the most recent quarter suggest that investments in Bedrock and other AI products are bearing fruit. Analyst Jim Kelleher at Argus recently wrote, "As the leading provider of infrastructure-as-a-service and other cloud services, [Amazon Web Services] is uniquely positioned in the burgeoning AI-as-a-service market."
The companies mentioned above are by no means an exhaustive list of Nasdaq-100 companies poised to benefit from AI. The index also includes the market leader in AI servers, Super Micro Computer; the market leader in digital experience software, Adobe; and the market leader in mobile processors, Arm Holdings. All three are already monetizing AI.
The pros and cons of the Invesco QQQ Trust
The downside associated with the Invesco QQQ Trust is risk arising from concentration and volatility. The index fund is heavily weighted toward the information technology sector, and that concentration has led to extreme volatility in the past. The fund has a three-year beta of 1.19, meaning it moved 119 basis points for every 100-basis-point movement in the S&P 500 during the last three years.
The upside associated with the Invesco QQQ Trust is supercharged returns. The information technology sector tripled the performance of the next-closest market sector over the last decade, and it nearly tripled the performance of the next-closest sector over the last two decades. As a result, the Invesco QQQ Trust returned 1,510% in the last 20 years, a compound annual rate of 14.9%. That means $150 invested weekly in the index fund during that period would be worth $633,000 today.
Here's the bottom line: The Invesco QQQ Trust will probably be a volatile investment in the coming years, and it will almost certainly underperform the S&P 500 during periods of economic hardship. However, the index fund carries a modest expense ratio of 0.2%, meaning the annual fee on a $10,000 portfolio would total just $20.
As such, the fund is a simple way for risk-tolerant investors to build a diversified portfolio of AI stocks. That is noteworthy because the AI boom could drive another decade of outperformance for the information technology sector, meaning the Invesco QQQ Trust could once again crush the S&P 500 over the next 10 years.
