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Tech ETFs Burning Hot on AI-Fueled Nvidia Surge

The technology space has become investors’ darling this year, especially on the artificial intelligence (AI) frenzy. Blockbuster first-quarter fiscal 2024 earnings from Nvidia NVDA have led to strong bullishness across the sector, fueling a rally in the stocks. The technology sector of the S&P 500 experienced a remarkable rise of 4.2% on May 25, marking its largest one-day gain since Nov 30 (read: Guide to Artificial Intelligence ETFs).

In fact, the semiconductor space has been on fire with the Philadelphia Semiconductor Index jumping 5.9% to hit its highest level in more than a year. VanEck Vectors Semiconductor ETF SMH stole the show, jumping 8.6%. This was followed by a rise of 6.7% each in Invesco PHLX Semiconductor ETF SOXQ and iShares Semiconductor ETF SOXX, 3.8% in Technology Select Sector SPDR Fund XLK, and 3.6% in Fidelity MSCI Information Technology Index ETF FTEC.

Nvidia Surge

Nvidia topped both earnings and revenue estimates buoyed by the strength of its data center business. It offered a bullish revenue outlook for the current quarter on the excitement surrounding an investment boom in AI technologies.

For the second quarter of fiscal 2024, the graphics chipmaker expects revenues of around $11 billion, plus or minus 2% on increased demand for its data-center family of products, including H100, Grace CPU, Grace Hopper Superchip, NVLink, Quantum 400 InfiniBand and BlueField-3 DPU, sparked by the AI boom. Nvidia CEO Jensen Huang said the company is seeing “surging demand” for these products and is “significantly increasing” supply. The company is boosting supply to meet surging demand for its artificial intelligence chips, which are used to power ChatGPT and many similar services.

The optimism has pushed Nvidia shares to an all-time high and closer to the $1 trillion market cap. It was up 24.4% at the close, marking the largest one-day percentage gain since 2016. More than two dozen Wall Street analysts have turned super bullish and raised their price targets on Nvidia stock after the company's lead in AI (read: ETFs to Buy on Nvidia's Blowout Q1 Earnings).

Other chipmaker stocks like Advanced Micro Devices AMD, Taiwan Semiconductor TSM, and Arista Networks ANET, and AI players like Microsoft MSFT and Google parent Alphabet GOOGL also soared.

Emerging Technologies

The sector outlook remains solid, given that the global digital shift has accelerated e-commerce for everything, ranging from remote working to entertainment and shopping. The rapid adoption of cloud computing, big data, the Internet of Things, wearables, VR headsets, drones, virtual reality, machine learning, digital communication, blockchain and 5G technology will continue to fuel the rally.

Safe Value Plays

Investors are now more confident in the sector's ability to deliver strong growth. This is especially true as mega-cap tech stocks have strong balance sheets, durable revenue streams and robust profit margins, making them attractive investments. They are better positioned to withstand a possible economic downturn. Additionally, some high-profile tech companies have demonstrated improved cost discipline, leading to better-than-expected earnings improvement.

Other Factors

The tech leadership is further supported by moderating U.S. inflation and bets that the Fed is nearing the end of its interest rate hiking cycle. As the tech sector relies on borrowing for superior growth, it is cheaper to borrow money for further initiatives when interest rates are low.

ETFs in Focus

VanEck Vectors Semiconductor ETF (SMH)

VanEck Vectors Semiconductor ETF offers exposure to the companies involved in semiconductor production and equipment. SMH follows the MVIS US Listed Semiconductor 25 Index, which tracks the most-liquid companies in the industry based on market capitalization and trading volume. VanEck Vectors Semiconductor ETF holds 25 stocks in its basket (read: Insights Into 13F Filings: ETFs to Bet Like Billionaires).  

VanEck Vectors Semiconductor ETF has managed assets worth $8.5 billion and charges 35 bps in annual fees and expenses. SMH is heavily traded with a volume of 7 million shares per day and has a Zacks ETF Rank #2 (Buy) with a High risk outlook.

Invesco PHLX Semiconductor ETF (SOXQ)

Invesco PHLX Semiconductor ETF tracks the PHLX Semiconductor Sector Index, holding 30 stocks in its basket. It is concentrated on the top five firms, indicating concentration issues.  

Invesco PHLX Semiconductor ETF has accumulated $111.5 million in its asset base. It charges 19 bps in annual fees and trades in an average daily volume of 86,000 shares.

iShares Semiconductor ETF (SOXX)

iShares Semiconductor ETF follows the ICE Semiconductor Index and offers exposure to U.S. companies that design, manufacture and distribute semiconductors. It holds 30 securities in its basket, with none accounting for more than 10% of assets.

iShares Semiconductor ETF has amassed $8 billion in its asset base and trades in a volume of about 753,000 shares a day. The product charges a fee of 35 bps a year from investors and has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: 3 Reasons to Bet On Semiconductor ETFs Now).

Technology Select Sector SPDR Fund (XLK)

Technology Select Sector SPDR Fund follows the Technology Select Sector Index and holds about 64 securities in its basket. It has key holdings in software, semiconductors & semiconductor equipment, and technology hardware, storage & peripherals.

Technology Select Sector SPDR Fund is the most popular and heavily traded ETF, with AUM of $45 billion and an average daily volume of 6 million shares. The fund charges 10 bps in fees per year.

MSCI Information Technology Index ETF (FTEC)

MSCI Information Technology Index ETF is home to 361 technology stocks, with AUM of $6.4 billion. It follows the MSCI USA IMI Information Technology Index.

MSCI Information Technology Index ETF has an expense ratio of 0.08%, while volume is solid at 197,000 shares a day.


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Advanced Micro Devices, Inc. (AMD) : Free Stock Analysis Report

Microsoft Corporation (MSFT) : Free Stock Analysis Report

NVIDIA Corporation (NVDA) : Free Stock Analysis Report

Taiwan Semiconductor Manufacturing Company Ltd. (TSM) : Free Stock Analysis Report

Technology Select Sector SPDR ETF (XLK): ETF Research Reports

VanEck Semiconductor ETF (SMH): ETF Research Reports

Alphabet Inc. (GOOGL) : Free Stock Analysis Report

iShares Semiconductor ETF (SOXX): ETF Research Reports

Arista Networks, Inc. (ANET) : Free Stock Analysis Report

Fidelity MSCI Information Technology Index ETF (FTEC): ETF Research Reports

Invesco PHLX Semiconductor ETF (SOXQ): ETF Research Reports

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