On January 27, Nvidia (Nasdaq: NVDA) Fell by 17%and knew more than $ 590 billion from his market capitalization. It marked the largest single-day market-cap destruction for a company in US stock market history.
While the growth means The next day, almost half of those losses recovered, there are still lessons to be learned from this historic market event.
Let’s dive in the interest of the sale, the risk that it exposes and how you can position your portfolio in response to this risk.
Despite enormous subdivisions in Nvidia, Broadcom (Nasdaq: AVGO)” Taiwan semiconductorAnd other chip shares, Monday’s sale was fairly insulated.
The next graph shows the 12 largest S&P 500 (Snpindex: ^GSPC) Components per market capitalization. Taiwan Semiconductor makes the reduction from a market-cappock inspection, but it is excluded from the graph because it is not in the S&P 500 index.
As you can see, technical companies such as Apple And Meta enjoyed solid profit, just like other market leaders such as Walmart And Berkshire Hathaway. In fact the Dow Jones Industrial average (Djindices: ^dji) won 0.7%on the day. And yet, the Invesco QQQ Trust (Nasdaq: QQQ)A stock market-related fund (ETF) that follows the Nasdaq-100 fell by 2.9%. The Vanguard S&P 500 ETF (Nysemkt: Voo) The S&P 500 follows in the same way and it dropped 1.4%.
Despite the profit for multiple stock market sectors, not to mention many individual technical shares, the S&P 500 and Nasdaq-100 still fell sharp that day because of how massively valuable chip shares such as Nvidia have become.
You can determine the impact of an individual shares on an index (or an ETF that keeps it) by multiplying its portfolio weight with the movement in the stock price.
For example, NVIDIA is about 7.5% of the Invesco QQQ and 6.6% of the Vanguard S&P 500 ETF. In the meantime, Broadcom represents 4.0% and 2.2% of companies in those two ETFs, respectively. Given their double digits on January 27, these two companies brought the Invesco QQQ 2.0% with a hand while they drag the Vanguard S&P 500 with 1.5%. In other words, only two mega -juice shares were responsible for most of the price movement in these funds.
The sale in Nvidia and Broadcom shows the risks of a top -heavy market. No matter how shocking this realization is, it is also a reminder of the importance of knowing the composition of an index fund before investing in, including benchmarks such as the S&P 500 and Nasdaq-100. However, there are ways to prevent the risk of concentration.