Billionaires are selling Nvidia stock and buying this supercharged AI index fund instead

Nvidia has been a spectacular investment in recent years. The stock has soared more than 700% since January 2023 on the back of excitement around artificial intelligence (AI). But enthusiasm is a double-edged sword. Numerous companies are now designing custom AI chips, and some investors are concerned that Nvidia will lose market share.

The following hedge fund billionaires addressed the situation by selling shares of Nvidia in the second quarter and redistributing capital in Invesco QQQ Trust (QQQ 0.45%)a growth-focused index fund that tracks Nasdaq-100 index.

• AQR Capital’s Cliff Asness sold 1.3 million Nvidia shares, cutting his stake by 8%. It also bought 9,254 shares of Invesco QQQ Trust, increasing its position by 332%.
• Steven Cohen of Point72 Asset Management sold 409,042 shares of Nvidia, reducing his stake by 16%. It also bought 1,500 shares of Invesco QQQ Trust, increasing its position by 150%.
• Israeli Englander of Millennium Management sold 676,242 shares of Nvidia, reducing its stake by 5%. It also bought 81,616 shares of Invesco QQQ Trust, increasing its position by 557%.
• Ken Griffin of Citadel Advisors sold 9.2 million shares of Nvidia, reducing his stake by 79%. It also purchased 2.8 million shares of Invesco QQQ Trust, increasing its position by 585%.
• DE Shaw’s David Shaw sold 12.1 million Nvidia shares, reducing his stake by 52%. It also started a small position in Invesco QQQ Trust.

Importantly, these trades do not signal a complete lack of confidence in Nvidia. Not only do all five fund managers still have positions in the chipmaker, but Nvidia is the third-largest position in the Invesco QQQ Trust.

That said, their decision to buy the index fund is a sensible one as they diversify their portfolios into more tech stocks that could benefit from the AI ​​boom. Here’s what investors should know about Invesco QQQ Trust.

The Invesco QQQ Trust offers strong exposure to technology stocks

Invesco QQQ Trust measures the performance of the Nasdaq-100, an index that tracks the 100 largest non-financial companies on the Nasdaq Stock Exchange. The index fund is heavily weighted towards the information technology sector. The top 10 holdings are listed by weight:

1. Apple: 8.9%
2. Microsoft: 8.3%
3. Nvidia: 7.7%
4. Broadcom: 5.1%
5. Amazon: 5.1%
6. Meta platforms: 4.8%
7. Alphabet: 4.6%
8. Tesla: 2.9%
9. Costco Wholesale: 2.7%
10. Netflix: 2%

Many investors see Nvidia as a paragon of artificial intelligence (AI) stocks because the company dominates the market for data center graphics processing units (GPUs), chips that are the gold standard in speeding up complex workloads such as model training of machine learning. But several other companies on this list are well positioned to monetize AI.

For example, Microsoft, Amazon and Alphabet have the three largest public clouds in the world. This means they should be major beneficiaries as companies invest in the cloud infrastructure and platform services needed to train AI models and develop AI applications.

Similarly, Broadcom helps customers like Alphabet and Meta Platforms design custom AI chips and recently won a major deal with OpenAI. This bodes well for the company because Morgan Stanley Analysts expect the custom AI chip market to grow faster than the GPU market by the end of the decade.

Finally, Tesla is dedicated to developing full software for self-driving (FSD), and the company plans to monetize its FSD platform through subscription sales and robotaxi services.

Invesco QQQ Trust has produced supercharged returns over the past 20 years

The Invesco QQQ Trust has been an excellent long-term investment. The index fund has returned 1,490% over the past 20 years, reaching 14.8% annually. By comparison, the S&P 500 (^GSPC 0.54%) it returned 641% over the same period, growing to 10.5% annually.

The downside of Invesco QQQ Trust is volatility. The fund is heavily concentrated in technology stocks, so weakness in that market sector could cause it to decline. Invesco QQQ Trust has a 10-year beta of 1.12, meaning it has moved 1.12 percentage points for every 1 percentage point move in the S&P 500.

Volatility cuts both ways. On the one hand, the Invesco QQQ Trust has doubled the return of the S&P 500 over the past two decades. On the other hand, the Invesco QQQ Trust fell much more sharply than the S&P 500 during the most recent bear market. Specifically, the index fund experienced a maximum drawdown of 35%, while the S&P 500 never fell more than 24%.

The last element to note is the expense ratio. The Invesco QQQ Trust has an expense ratio of 0.2%, meaning investors will pay $2 a year for every $1,000 invested in the index fund. This is below the industry average of 0.36%, according to Morningstar.

Here’s the bottom line: Invesco QQQ Trust is a growth-focused index fund that tracks several companies well-positioned to benefit from the AI ​​boom, including Nvidia. The index fund’s concentration in tech stocks makes it volatile, but that volatility has been an asset over the past two decades given its outperformance against the S&P 500.

I think the Invesco QQQ Trust will continue to outperform over the next decade as the AI ​​boom unfolds. Patient investors who are comfortable with risk and volatility should consider buying a small position today. And shareholders should focus on market weakness, adding to their position during significant pullbacks.