Billionaires sell Nvidia stock and buy index fund supercharged for artificial intelligence (AI) boom

Nvidia has been a phenomenal long-term investment, with shares up 2,630% over the past five years. However, several hedge fund managers (whose bona fide investments include billions of dollars in net worth) trimmed their positions in Nvidia in the first quarter as they reallocated funds to Invesco QQQ Trust (QQQ 0.52%)a supercharged index fund that tracks 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 Invesco QQQ Trust.
• Ken Griffin of Citadel Advisors sold 2.4 million shares of Nvidia, reducing his stake by 68%. And it increased its stake in Invesco QQQ Trust by 74%, although it still ranks as a relatively small position.
• Steven Schonfeld of Schonfeld Strategic Advisors sold 96,793 shares of Nvidia stock, reducing its stake by 58%, while it increased its stake in Invesco QQQ Trust by 1,584%, making it its fifth largest position excluding options.

Cohen, Griffin and Schonfeld ranked among the most successful hedge fund managers in the first half of 2024, according to Business Insider. But readers shouldn’t take their trades to mean that Nvidia is a bad investment. All three billionaires still own shares of the semiconductor company, suggesting a degree of trust.

Instead, the lesson here is about portfolio diversification. Grand View Research estimates that artificial intelligence (AI) spending will approach $2 trillion by 2030, and analysts at the Swiss investment bank UBS believe that “AI will be the most profound innovation and one of the greatest investment opportunities in human history.”

Nvidia won’t be the only winner as this opportunity plays out; it might not even be one of the biggest winners. In this context, the Invesco QQQ Trust is worth considering because it offers an easy way to build a diversified portfolio of AI stocks.

Invesco QQQ Trust is heavily weighted to information technology stocks

Invesco QQQ Trust measures the performance of the Nasdaq-100 Index, which itself tracks the 100 largest stocks listed on the Nasdaq Stock Exchange. Invesco QQQ Trust is a growth-focused index fund heavily weighted towards the information technology sector. The top 10 holdings are listed below by weight:

1. Apple: 9.1%
2. Microsoft: 8.3%
3. Nvidia: 7.2%
4. Alphabet: 5.2%
5. Meta platforms: 4.9%
6. Broadcom: 4.8%
7. Amazon: 4.8%
8. Costco Wholesale: 2.7%
9. Tesla: 2.7%
10. Netflix: 1.9%

Several of the companies listed above are well positioned to monetize AI, albeit in different ways:

• Apple is one of the largest manufacturers of smartphones and personal computers 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 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 chips underpin all of the most advanced AI systems, giving the company an estimated market share of more than 80 percent,” according to the data. 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 on 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 measured by monthly active users. The company is investing in AI to improve ad engagement and relevance. Deepak Mathivanan of Wolfe Research believes that these investments could have a significant effect on the financial situation in the medium term.
• Broadcom is a market leader in application-specific integrated circuits, custom chips designed for specialized use cases such as AI. Goldman Sachs Analysts recently wrote: “Along with Nvidia, we view Broadcom as a critical piece to the ongoing AI infrastructure development.”
• Amazon operates the world’s largest public cloud, and market share gains in the last quarter suggest that investments in Bedrock and other AI products are paying off. Analyst Jim Kelleher of Argus recently wrote: “As a 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; market leader in digital experience software, Adobe; and market leader in mobile processors, Arm holds. All three are already monetizing AI.

Invesco QQQ Trust Pros and Cons

The downside associated with the Invesco QQQ Trust is the risk arising from concentration and volatility. The index fund is heavily weighted towards the information technology sector, and this concentration has led to extreme volatility in the past. The fund has a three-year beta of 1.19, meaning it has moved 119 basis points for every 100 basis point move in S&P 500 during the last three years.

The advantage associated with the Invesco QQQ Trust is supercharged returns. The information technology sector has tripled the performance of the nearest market sector over the past decade and has nearly tripled the performance of the nearest sector over the past two decades. As a result, the Invesco QQQ Trust has returned 1,510% over the past 20 years, a compound annual rate of 14.9%. That means $150 invested weekly in the index fund during that time would be worth $633,000 today.

Here’s the bottom line: Invesco QQQ Trust is likely to be a volatile investment in the coming years and will almost certainly underperform the S&P 500 during periods of economic distress. However, the index fund has 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. This is noteworthy because the AI ​​boom could lead to 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.