Nvidia concentration drives top-performing ETF in 2024

Nvidia comprised almost 70% of the ETF's performance year-to-date

Jamie Gordon

Nvidia building

Amundi’s semiconductor ESG strategy has been Europe’s top-performing ETF since the turn of the year, owing to a considerable allocation to high-flying chipmaker Nvidia.

According to data from justETF, the $306m Amundi MSCI Semiconductors ESG Screened UCITS ETF (CHIP) has surged 23.4% since the turn of the year, taking its returns for the trailing 12 months to 82.7%, as at 23 February.

CHIP, which claims the mantle of Europe’s oldest semiconductor ETF having launched in 2007, has recently turned heads after leaving the rest of the ETFs addressing the theme in its wake.

In fact, the largest and second-best performing ETF in the product class, the $1.5bn VanEck Semiconductor UCITS ETF (SMH), currently lags CHIP’s returns by 8% this year and 14% over the past 12 months.

However, the rift between CHIP and its peers owes to a specific methodological feature allowing Amundi’s candidate to take outsized bets on single names.

Whereas VanEck’s SMH – tracking the MVIS US Listed Semiconductor 10% Capped ESG index – and other semiconductor ETFs from BlackRock and HSBC Asset Management abide by the UCITS 5/10/40 rule, CHIP employs the 20/35 rule, enabling its largest constituent to claim a weighting of up to 35%.

This means the ETF has been most exposed among its peers to Nvidia’s growth in semiconductor market share, with its market cap swelling from $575bn on 26 February 2023 to just over $2trn today.

Over the same timeframe, the company’s share price has exploded 240.9%, with a recent surge driven by $22.1bn revenues in Q4 2023 announced last week, ahead of expectations by $1.7bn.

Following the earnings, CHIP jumped 6.8% and the weighting of Nvidia within the ETF jumped from 26.5% to 34.2%.

Vincent Denoiseux, head of investment strategy at Amundi, told ETF Stream: "NVIDIA contributed to almost 70% of the index performance year-to-date with a staggering 59% total return over the period, as at 23 February.

"NVDIA’s weight in the index stands currently at 34.2%, so just below the 35% individual cap for the largest index member."

For some long-time thematic ETF investors, this degree of concentration may conjure up memories of the iShares Global Clean Energy UCITS ETF (INRG), which underwent a ‘special rebalance’ following concentration risks highlighted by benchmark provider S&P Dow Jones Indices.

Unlike INRG, however, CHIP’s high-conviction allocation is to the world’s fourth-largest company by free-float market cap, meaning ETF ownership will not influence prices of the stock the way ETF inflows impacted the small and mid-cap companies captured by INRG at the time.

On the other hand, the fact CHIP’s Nvidia allocation is more than three times the weighting of its next top holding – and likely 10 times the weighting of most of its 79-strong basket – means investors in the ETF are knowingly or unknowingly making a decisive single stock bet.

While this may not be problematic for some semiconductor and Nvidia proponents, it is worth considering the implications from an index construction perspective.

For instance, MSCI acknowledges CHIP’s underlying index is rebalanced on an “as needed” basis at the end of any day when index constraints are breached.

While the index provider places a 10% ‘buffer’ on its 20/35 caps, Nvidia claimed almost a 40% market share in semiconductors and 90% of the AI GPU market by the end of 2023, so the prospect that it reaches a 45% weighting of MSCI’s semiconductor ESG index is not beyond the realms of possibility.

Furthermore, even if this scenario were not to materialise, investors should consider the index’s semi-annual rebalance dates – at the end of May and November – which will see constituents reset according to market cap and single position caps.

CHIP, as with other thematic ETFs before it, also acts as a reminder of the unique characteristics of the product class and how seemingly diversified products can be subject to narrow leadership among a handful of names.

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