The stock market has been a rocket ship over the past two years. What is the main fuel powering the upward climb? Artificial intelligence (AI). Many of the world's largest tech companies have invested heavily in training and deploying costly AI models, and some of those companies have also benefited tremendously from the massive AI investment.
But Chinese company DeepSeek recently caused the rocket ship to veer off course. DeepSeek's introduction of its R1 model prompted many investors to question whether their underlying premises about the AI market were correct. R1 reportedly beats other top AI models, including OpenAI's ChatGPT o1, on key benchmarks. It's also much more cost-effective.
DeepSeek isn't just shaking up individual AI stocks. It's also affecting major exchange-traded funds (ETFs) with heavy ownership in those stocks.
Image source: Getty Images.
Vanguard's top ETFs with significant AI exposure
Vanguard ranks as one of the world's largest fund managers. The company markets 88 ETFs, several of which have significant AI exposure.
The Vanguard S&P 500 Growth ETF (VOOG 0.50%) invests in growth companies that are members of the S&P 500. Its top holdings include:
- Nvidia (NVDA +0.19%)
- Apple (AAPL +1.00%)
- Microsoft (MSFT 1.15%)
- Facebook and Instagram parent Meta Platforms (META 2.61%)
- Amazon (AMZN 0.91%)
- Tesla (TSLA 1.98%)
- Google parent Alphabet (GOOG 1.19%) (GOOGL 1.26%)
- Broadcom (AVGO 1.74%)
These AI stocks combined make up roughly 51.6% of the fund's total portfolio.
It's a similar story for the Vanguard Mega Cap Growth ETF (MGK 0.36%). As its name indicates, this ETF invests in growth stocks with mega-cap valuations (market caps of $200 billion or more). The stocks listed as the top holdings for the Vanguard S&P Growth ETF are also among the top positions of this Vanguard ETF, comprising around 59.2% of the fund's total assets.
The Vanguard Information Technology ETF (VGT +0.44%) focuses only on information technology stocks, many closely tied to AI. Its top holdings include Apple, Nvidia, Microsoft, and Broadcom. These four stocks alone account for 50.8% of the ETF's portfolio.
What's the impact of DeepSeek on these ETFs?
All three of these Vanguard ETFs initially fell as investors processed the potential impact of DeepSeek's new AI model. The Vanguard Information Technology ETF was hit the hardest. This isn't surprising, considering Nvidia makes up nearly 15% of the fund's portfolio. Nvidia's share price plunged due to worries about how DeepSeek might affect the demand for its graphics processing units (GPUs).
However, these Vanguard ETFs quickly bounced back, recovering much of their initial losses incurred as a result of DeepSeek's news. I think there are two reasons behind the rebounds.
First, many of the stocks owned by the Vanguard funds could be helped by the promise of lower-cost AI models. Although Nvidia's share price sank in recent days, the stocks of companies, including Apple, Alphabet, and Amazon, have held up well. And Meta's shares soared after announcing better-than-expected fourth-quarter earnings.
Second, questions have arisen about just how bad the DeepSeek development really is for Nvidia. Some even think DeepSeek's low-cost R1 model could ultimately be bullish for Nvidia by increasing the overall demand for AI.
Are these Vanguard ETFs still good picks?
So, are these AI-heavy Vanguard ETFs still good picks in the wake of the DeepSeek drama? I think so.
Disruptions are to be expected with any technology, including AI. However, many of the tech giants in these ETFs' portfolios have proven quite adept at adapting to changes. I suspect they'll do so again. Also, as mentioned, some will benefit from lower-cost AI training and deployment.
My only concern with all three of these Vanguard funds is their valuations. The Vanguard S&P 500 Growth ETF's trailing-12-month price-to-earnings ratio is 34.6. The other two are even more expensive, with earnings multiples of 42.2 and 40 for the Vanguard Mega Cap Growth ETF and Vanguard Information Technology ETF, respectively.
Still, I predict AI will continue to fuel the overall stock market's momentum over the next five to 10 years. And I expect these three Vanguard ETFs should be big winners.
