What’s behind the NVDA rally? How can you participate? What ways could you minimize your risk?
Nvidia (Symbol: NVDA) has surpassed Tesla (Symbol: TSLA) as retail traders’ favorite stock. The semiconductor giant’s run, which began last year, has resulted in a new trillion (with a T!) dollar company being born.
Believe the hype?
The current run is fueled primarily by the hype around artificial intelligence (“AI”) and the breakout success of applications such as ChatGPT. Every company in the world seems to be pushing AI to the front of their business strategy. NVDA is the clear winner, at least in these early days, of the AI boom.
I don’t want to make it seem like NVDA was an overnight success by any means. They have long stood tall in the gaming industry. I have sworn by Nvidia’s graphic processing units (“GPUs”) ever since I built my first computer. Not to dig at AMD’s (Symbol AMD) Radeon series cards.
In addition to the gaming pedigree, the chip-maker was a benefactor of the crypto craze as well. The processors are used to “mine” various digital assets, not least of all is Bitcoin. This AI trend is just another reason NVDA stays winning.
Early in the historic rise some speculators thought this was just the newest “meme stock”. They were comparing the use of NVDA by retail traders to what happened with Gamestop (Symbol: GME), AMC (Symbol: AMC) or Bed, Bath & Beyond. NVDA has continued to shock, again and again, with their earnings.
There is evidence that can be used to argue this bull run has legs. A double digit percentage POSITIVE surprise in the last four earnings reports. Analyst estimates keep climbing and they keep surpassing them. NVDA is pulling in serious cash. Obviously the big questions remain. The ones that we can never answer. Will this continue? Are we in a bubble?How much will AI change our lives? We won’t know the answer until we can see it in the rearview mirror.
How to buy NVDA
With all that being said, how can YOU invest in NVDA you might be wondering? The most obvious answer is buying the stock outright. This avoids some of the expenses of the strategies below, however this exposes you to several risks. First is what we call company risk. This is the risk of an individual company underperforming the benchmark. If you buy NVDA at all time highs and the trend reverses you may be stuck holding the bag. The second is concentration risk. If your brokerage doesn’t allow trading in fractional shares, purchasing a single share of NVDA may represent a large investment for many investors. You could be left in a position where a majority of your portfolio in just NVDA.
I would like to counter with an even more obvious answer to the question. If you want to buy NVDA just buy everything (or at least a large basket of things). The SPDR S&P 500 ETF (Symbol: SPY), Invesco QQQ Trust (Symbol: QQQ), and Technology Sector Select SPDR Fund (Symbol: XLK) has approximately 4,5,6% allocation towards NVDA respectively. These funds offer low-cost exposure with the additional safety net that diversification provides.
Single-Stock ETFs
The following funds are not for the faint of heart. The carry heavy-fees, utilize options to generate leverage as well as income. They are complex products. You would be wise to read their prospectus before investing (you should always do that but here especially!)
One of these adventurous funds that may catch your eye is GraniteShares 2x Long NVDA Daily ETF (Symbol: NVDL). The third highest returning ETF last year gives investors access to two times NVDA’s daily moves. Leveraged ETFs are only for the most risk tolerant investors. In fact in the prospectus If NVDA continues its monster rally this could reward investors handsomely. The leverage goes both ways however. If the stock were to pull back, NVDL investors would see declines twice that the underlying makes.
From the prospectus:
"The Fund could theoretically lose
an amount greater than its net assets in the event the Underlying Stock declines more than 50%"With high amounts of leverage and a steep expense ratio of one hundred fifteen basis points (1.15%) the only party guaranteed to make money is the issuer GraniteShares.
Another single-stock ETF (also with a high expense ratio) is YieldMax NVDA Option Income Strategy (Symbol: NVDY). This ETF utilizes a covered call strategy on NVDA. It uses an out-of-the-money call anywhere from 5-15% above NVDA’s current market price. The call does limit the upside on a monthly basis, but it can generate premiums for selling the call. The fund pays a portion of the premium received to investors as income.
This approach has two things that separate it from the 2x levered approach. Firstly, the lack of leverage is beneficial when the underlying moves downward. You are not exposed to that leverage risk. Additionally, the monthly income goes a step further and actually hedges during down periods.
Contact US
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This is not intended as a recommendation, or investment advice. Leveraged and Inverse ETFs have special risks associated with them. Educational purposes only. Before you make any investment decision, please do your own research or speak to a professional advisor.
