Dark days for leveraged ETFs tracking US tech giant Nvidia as the company plummeted 17 per cent on 27 January.
The cause of the US tech sector woes was the arrival of Chinese rival DeepSeek R1, which offers AI for a fraction of the price, introducing new competitive dynamics in the industry and prompting discussions about the future of global technology leadership.
Nvidia’s losses were bad news for all investors exposed to the US tech giants but made particularly painful reading for those allocating to ETFs that use derivatives to provide leveraged exposure to a stock or a sector.
Morningstar reports that one leveraged Nvidia ETF lost 51 per cent as result of its three times enhanced exposure to the company that lost 17 per cent in a single day. Meanwhile no open-ended funds saw losses below 8 per cent.
Bradley Smith, Director and International ETF Specialist at Invesco, says the reaction to DeepSeek serves as a reminder of the importance of diversification, and points to the dominance of a handful of tech stocks in the S&P500.
“The S&P 500 Equal Weight Index outperformed the market-cap-weighted S&P 500 Index – which is top-heavy with tech stocks – by 1.48 per cent on 27 January when the DeepSeek news first hit the market. It’s not just that the weight in the top 10 names in the S&P 500 is near a record level, it’s that many of these large names are doing similar things in the tech space. This means that the sources of return driving the S&P 500 Index have greatly diminished.”
Smith says before COVID, the S&P 500’s composition was drastically different and investors tracking the index are vulnerable to volatility in the Magnificent Seven.
“With the rise of mega-cap technology names [the composition of the S&P 500] has changed and it underscores the need to add alternative sources of return to a portfolio, which could include an S&P 500 Equal Weight strategy, commodities, non-core fixed income, private markets, and more,” he says.
Nancy Tengler, CIO & CEO of Laffer Tengler Investments and portfolio manager of the TGLR ETF, says US tech companies had been aware of DeepSeek for some time and the long-term impact of its launch has been overblown.
“DeepSeek was not new information. And the timing of the sell-off seems worth noting, on the heels of The Stargate Project [a new company which intends to invest USD500 billion over the next four years building new AI infrastructure for OpenAI]. Silicon Valley knew of DeepSeek. Meta had set up war rooms. On reflection I think the Chinese propaganda machine ‘alley-ooped’ US investors,” she says.
She continues: “It should also be noted DeepSeek crashed yesterday. I don’t see any Fortune 500 companies adopting the model. I do see that Silicon Valley will learn from the DeepSeek breakthroughs and spending will actually increase.”
John Belton, PM on growth portfolio at Gabelli Funds and the GGRW ETF agrees that concerns about DeepSeek may have gone too far.
“DeepSeek did achieve some exciting engineering breakthroughs which will help other AI labs build models more efficiently. But many headline figures associated with these breakthroughs are misleading. This is more evolutionary than revolutionary, and consistent with natural and normal tech progress where we’d expect compute efficiencies over time,” Belton says.
