How Nvidia's size is rewriting the market playbook

Yahoo

5 days ago

Listen and subscribe to Stocks In Translation on Apple Podcasts, Spotify, or wherever you find your favorite podcast.Nvidia's (NVDA) explosive growth is doing more than lifting portfolios - it's changing the whole market.In this episode of Stocks in Translation, Strategas Securities senior ETF and technical strategist Todd Sohn joins host Jared Blikre and Producer Sydnee Fried to discuss exchange-traded funds (ETFs). Sohn explains how ETFs serve both long-term investors and active traders while warning about overexposure to tech due to market dominance, with Nvidia as a prime example. The trio also talks through the underperformance of healthcare ETFs, outdated index regulations, and the importance of knowing what you own in an ETF-driven market.
Twice a week, Stocks In Translation cuts through the market mayhem, noisy numbers and hyperbole to give you the information you need to make the right trade for your portfolio. You can find more episodes here, or watch on your favorite streaming service.
This post was written by Lauren Pokedoff
Welcome to Stocks and Translation, Yahoo Finance's video podcast that cuts through the market mayhem, the noisy numbers, and the hyperbole to give you the information you need to make the right trade for your portfolio. I'm Jared Blicker, your host, and back with me is the voice of the people, Sydney Fried, who is here to ask the people's questions and keep us honest. It has been a while since I've missed you. Thank you. I miss being here. I was back Monday, but it's great to have both of us back here. And today we're gonna be talking.About exchange traded funds or ETFs. Why they're underappreciated, according to our ETF loving guest today, we break down the different flavors, what to look out for and how to read their ingredients like an FDA label. In fact, ETF is our word of the day, and this episode is brought to you by the number $9.05 billion. That's how much money is poured into commodity ETFs since those April 8th lows, and you can double that if you include pressure.metals. We're gonna dig into how truly diversified your portfolio is even as bonds continue to disappoint year after year. Is the 60/40 portfolio dead? And without further delay, let's get to our featured guest of the day, Todd Sohn. He is the senior ETF and technical strategist at Strategic uh Securities, and Todd lives and breathes ETFs. I know this for a fact. His enthusiasm for the asset class is palpable every week. He sends me aslide deck full of original analysis on ETFs, stuff I am truly seeing nowhere else, and we're gonna share a bunch of that with you, the viewer today. So Todd, I saw you last week at a CMT event that's charted market technicians for chart nerds like me and, well, some others, and, uh, you gave a great presentation on kind of the state of the market here and how you're seeing that through the lens of ETF. So just give us a brief run of all,
that was very kindintroduction. Thank you so much guys. to be with you again.Uh, let's see, state of the market. We are back to all-time highs in stocks. Bonds are still, uh, struggling here, but you do get 4.2% in short duration income producing vehicles. That's great. Um, and I, I wouldn't be terribly surprised given the run we've just had, one of the best 3 month runs in history coming off of the April market low to see stocks maybe chop around for the summer. I don't think that's unreasonable. Think of a car going 0 to 60 and you kind of got to cool the engine off here. So still in very good shape, um, but be patient, I think over the next couple of months.
All right, so let's get to our word of the day ETF and we're gonna break it down for the viewers. In exchange traded fund bundles many stocks, bonds, or other assets like commodities, cryptos into one ticker symbol that trades intraday like a single stock. And I say intraday because unlike mutual funds, they trade all day long. You can only get in and out of mutual funds at the close of the of the day. So ETFs come in many different flavors. A recent trend is the use of leverage, and we talked about that the last time you were here, Todd. So just tell us.About ETFs in general.
SoETFs do two things, uh, I would say for investors. One, they're a great low-cost long-term investing tool, depending on what you're, you're buying, right? The idea of saving for retirement or maybe that big purchase down the line, a house, a car, Xbox, who knows? Uh, but they're also great lens into the, the temperature of the market, right? I can see what ETFs are outperforming, where flows are going, what kind of products are coming to the market, because ultimately if something's hot, you're going to see many issuers launch similar types of products, copycats to the extent.And I can give you a pretty good sentiment check, and I think that's very helpful if you're someone who is more in the weeds on a day to day, week to week type of basis.
So what's going on with these leveraged ETFs.
Let's see, the bulk of ETF assets are in passive investing vehicles,
very boring. S&P 500, whatever,
keeping it simple for the long run. That's what most 98% of us should be doing for the long term, all three of us,
but the 2% 2%
like to use what are leveraged vehicles, and you're gonna basically going to get 2 times the return on a daily basis for an asset. And there is a very new trend, it's only about 3 years old where you're putting leverage on single stocks now. So if I'm very bullish on Nvidia.I can buy 2 X levered Nvidia ETF that if Nvidia is up 2% today, the fund should give me a 4% return. And you're seeing this explode to stocks all the way down the cap scale, so very volatile type of names, like a Rocket Labs or Archer Aviation or hymns in hers, really kind of esoteric stocks that maybe they're the future growth companies of America.Um, but are also very much high conviction if, if you want to scratch that itch away from just pure passive investing.
How do you even find leverage? Like, is it just when you're doing your buy order on whatever brokerage you use? Is it just like an option when you go to a certain ETF?
It has to be an approved product to be issued, right? So now there's probably about 130 of them right now. So they're not available on everything.Issuers such as you know, Defiance, very friendly with Sylvia Jablonsky, she's great. They come out with these, these ETFs. They get to the show. Yeah, she's excellent, wonderful person, um, and they'll they'll say, all right, we're gonna file for a leveraged Rocket Lab.
They're tick.
Oh yeah, oh yeah, like you can bet, OK, do I want to buy Tesla because I think it's gonna go to, uh, you know, up today, you can get a 2x of the normal stock return. But Todd, just refresh us because we talked about the.Dangers of leverage before. And if you get, and I've seen this in real time, if you get a stock that's going like this and then it kind of chops its way north, you can actually lose money even though the stock has gone up on these leverage products just because of the volatility.
You have to, this is where reading the label matters. They reset the leverage every single day. So today you are supposed to get 2x the return or inverse the return depending on the product.That resets and then tomorrow you get 2 X from that point. It's not a cumulative effect.K involved
even if it's up after a week or net on the month, you might not experience that in the daily. You really
want these products. I mean, technically not supposed to open them for more than a day, but if there's a very fast up trending market.That's when a real profits are made. If you chop around, then you're you're gonna end up with losing more than what the actual underlying stock has done. So
which sectors or stocks are big right now and leverage ETF? Yeah,
I know I was just gonna ask about tech tech is huge and then tell us about that and some of the uh the dogs, tech
communications and some of these more thematic.Industrial type of plays, uh, I keep saying Rocket Lab or quantum computing is also getting big. Stocks that are really less traffic, less traffic in passive indices, they don't have a lot of heft.Um, but they come, they're very trader friendly, you'll find them on message boards and whatnot, people liking a product, maybe they're drone makers, right, those are popular too, but you're not gonna see them for something like Verizon, that's just too boring. Nobody wants that. Uh, Verizon is a dividend type of stock, so you won't get it in on in say consumer staples, telecom, but you're gonna find it in very high beta type of names that come usually come from the technology sector.
One of the things you flagged that I thought was fascinating here is Nvidia. So Nvidia makes up about 7.5% of the S&P 500, and you compare Nvidia to entire sectors. So utilities is about 2.5%, so Nvidia is 3 times the size of all utilities.put together, all the utilities in the S&P 500. Energy, it's 2X. Staples is 5%, 5.5%, so it's uh just kind of 1 X that. But then healthcare, which is a huge sector, you think about Pfizer, Merck, and then all the, you know, some of the smaller companies like uh Moderna.Healthcare is 9.25% and Nvidia, the biggest stock in the solar system is closing in on that.
This is a really fascinating aspect right now. The S&P is this ever of changing index. 30 years ago, financials were big. 20 years ago, energy was big. Now it's tech.And if you think, you know, if you're an investor, you think, OK, I'm buying the S&P 500, I'm buying big US stocks. I'm, I'm diversified. That diversification is shrinking by the day because tech is overwhelming the index and Nvidia is bigger than staples, it's bigger than energy, it's bigger than utilities, real estate materials. It's closing in on the industrials and healthcare, so one stock is bigger than these massive, massive sectors.And so, OK, that's great, it's benefitted investors, but if you're looking at a portfolio, and you own the S&P and you own large cap growth by chance, and maybe you own a thematic AI fund because you're bullish on it.That's a lot of exposure to a small cohort of names that are usually found in those indices like Nvidia, Microsoft, Meta, right?So I just worry that investors need to understand what they own now. It's becoming more and more important just given how these companies are really taking over the world.
I want to ask you too, I, I noticed this a few months ago, did, um, a chart segment on this. There is a disconnect between the XLK, for instance, and XLK is large cap tech. It's one of the spider funds. Uh, it tracks the S&P 500 tech universe and the actual, if you were to compute all of the.Uh, weights, uh, market cap of all of the tech funds in the S&P 500. XLK is actually underweight on a lot of names. So, and that has to do with laws that go back to the 1930s and 1940s. So highlight, you know, some of the risks to investors, you know, you think you're getting large cap tech, but you're actually underweight some of the things that you might think you're buying.
The rule, these rules were created for 40A funds, right? 1940, almost, we're getting close to 100 years when this was made. And it appears to me that the market.is now challenging these rules that were made and they're challenging index providers to say, hey, these rules were not built. This methodology was not created for trilliondollar
type stocks, ETF vigilantes. That's what I'm that's
that's I've never heard that before. That's.
Uh, you said leverage isn't for everyone. How do you decide whether you want to wade into that because it's so, it sounds risky, but it also sounds like all, alluring, but if you're just choosing something like Nvidia.How how big of a
it's my gosh, we have a semiconductor or we miss earnings and the stock goes down 10%, you'll be 20%.
OK, 100%.
But if it goes up 10%, then it comes 10%, 20%. So this is you have to pay attention. It's the
best thing you could say is OK.Know what your risk tolerance is. If you, if you're 21 years and older and you walk into a casino, do you get uncomfortable or do you love the lights and the chips and the cards? That's a good analogy. Um, but just know, OK, I have $100 to spend after that I'm leaving the room, so you really need to understand what.How much of an allocation you'd want to use for these leverage products. I wouldn't it.
OK, I have
always wanted to try that. I do.
I mean, maybe that's because if you use an option.You know what your, your risk is.
You're you're buying it, you have defined. You put up the money up front and you just let it sit and you hit a home run.
That's, let'sbe real here.
Talk to me real quick. We got a minute before the break about healthcare because this has been, this is one of the dogs.I was thinking about when I said that word.
Yeah,so, gosh,
healthcare
not loved, unloved massive outflows from healthcare sector, ETFs so it's very cold temperature. Investors don't like healthcare. Healthcare's performance of the last 5 years is in its bottom decile to the S&P using 50 years of data. So that's
performance, not even flows, yeah,
reallybad. So big outflows, horrendous performance.Can this thing ever work again? I, I, I mean, I've, I've wanted to, and it's just been wrong. But healthcare is interesting because you get value characteristics from farm own equipment and growth characteristics from biotech. So there's a lot of interesting stuff going on in that sector.
I agree. And there are biotech ETFs which are, leave out the big boys. We need to take a short break, but coming up we're gonna be talking portfolio diversification with commodities ETFs and a culinary runway showdown that might just get you reading those ETF ingredients after all.This episode is brought to you by the number $9.05 billion which is how much money investors have poured into commodity ETFs since those scary post-liberation Day lows on April 8th. Now I got this from one of your slides, Tom, Todd, and I note that precious metals are actually also in the $9 billion range there. So you add those two together and 18 $18 billion I keep want to say $1 trillion but that's actually challenging crypto for the number one.One spot in what has been working the best in terms of investor expectations since those April 8th lows. And so Spot crypto has taken in 19.9%, basically $20 billion and commodities including precious metals is two. So talk to us about that.
I think investors are realizing that, OK, 10 stocks are almost 40% of the S&P. Defensive sectors like we were talking about before, only 20%, that's a 35 year low. So this diversification benefits disappearing. They need to find other routes toWhether it's protect or just alter our portfolio, crypto is clearly becoming an important allocation. Um, there's also probably a fear of missing out aspect to that.And then commodities can at least offer uncorrelated returns to stocks, ideally. So I think that's where the gold comes in, or you can buy a broadly diversified commodity ETF. So you'll have energy, agriculture, some other metals like palladium and platinum. This is all very much a diversification play rather than chasing returns like you'll see from some othergroups.
Gold has been a thought for me because when we did see the markets kind of turned down in April, I believe, and they've recovered since then, a part of me was like, well, you know, I don't.I don't think I have enough diversification, even, even within my ETFs, by the way, which we can talk about. But I looked at commodities, people talking about silver prices, gold prices. So what do you think about commodities for a passive investor? Like, does everyone need X%?
I think it helps. Now there's different, there's some differences, right? They can be taxed differently, but I think that 101 type, but I wouldn't worry about that too much, um, depending on what type of investor you are.But they're at least different. They're not in Nvidia, they're not AI, they're not technology. So gold, right, there's a movement towards gold because of the geopolitical side that's going on. We can figure out any catalyst, right? Maybe it's a weaker dollar that benefits gold too. Um, so I think having these assets that can rise during equity volatility is just a benefit to, to protect your portfolio. It may not make up the whole difference, but at least provide a padding. You fall down, you fall on a mat, you'll be OK, as opposed to on a hard floor.
I, I posed a question at the top of the show. Is the 60/40 portfolio dead? And, and traditionally this is the 60/40 portfolio is 60% equities, 40% bonds, and that's something that has worked on and off through large spans of time and it specifically it really works in the 80s, 90s, and the first maybe 1520 years, but after the pandemic, it is done very poorly. When we had the 2022 bear market, bonds lost money and so they exacerbated the downside and investor poor.fo li o s So what do you think of bonds right now?
I like staying down the curve. We don't want duration risk, which is how much your bonds will be affected by moves in interest rates. So on the, I can buy a 3 month treasury bill, I can buy a 1 year Treasury bill, and I will still get around 4%. That's pretty good. If I buy a 10 year treasury or a Treasury ETF, I will get maybe closer to 4.5, but it comes with a lot of volatility because of duration risk. We're about 10 months since the first rate cut, uh, from the Federal Reserve in this cycle last September.Long duration treasuries and long duration corporate bonds are down since then as an index. So that's really rare. Usually bonds rise.
That was a slide in the you sent me. So this is a very rare situation. And let me throw in this because the news of the day is, uh, Donald Trump, President Trump, was threatening to fire Jay Powell, and he's talked about this before, but apparently there was a letter that got circulated. The New York Times got a hold of it. Uh, we saw stocks.Dipped to the lows of the day. It was a fairly dramatic sell-off in a short amount of time. And then Trump recanted, stocks popped up again, but how do you see this risk affecting some of these shorter duration assets and because this has to do with where the Fed is going with its short term rates.
So if you start to see rate cuts, which we'll see if the administration has its way, I, I have no edge in that, right? It's a lot of noise, which is why we want to invest for the long run.Uh, rate cuts will start to impact those short duration bonds, you will get less income. That's the risk if you have most of your money in short term bond ETFs.Um, now, on the long end, OK, maybe if rates do decline, that could actually give you a little bit of a boost in terms of price return for a longer duration bonded, uh, ETF, but just remember the volatility involved. I think that's, you know, can you stomach the ETF labeled treasury bond being higher volatility sometimes than stocks. That's really tricky. I don't think a lot of investors realize that.
Another potential diversifier international stocks. A few people have said to me recently to own 1% of international in your portfolio, and a couple of the answers were higher than I expected. So what do you think of international ETFs?
I'm a fan because they are they're less growth oriented than the US. Now the US is the best market. I think there's no doubt about that.But we're at a point where again diversifying, I think really matters. So I can buy Europe, I'll get more industrial and financial stocks. If I buy Japan, I get a lot of industrial stocks and really interesting consumer technology. It's called video games, right? They're great at making their their games there. So, Europe and Japan, I don't know if you want to be overweight to the US but have some percentage of your portfolio, maybe it's 5 to 10%.Uh, in there as well. Emerging markets, I'm not sold on. I think that's easier to play using maybe an active manager who really knows the space as opposed to going passive. Um, but you absolutely, I think, want to have international exposure at this point just for the diversification benefits and to water down how much growth and AI exposure you might have. I wouldn't know how to pick one, I think for there's dartboards or listen, there's ETFs that are.Um, developed international ETFs from Vanguard, iShares, all sorts of providers that give you the whole, uh, world exposure. It's the easiest route to go. All right,
we're gonna stick with ETFs here, but we gotta cue the runway lights because it is time for who wore it better. Our markets-based take on a Hollywood Gab show favorite. Now, on the left catwalks, struts our ETF food label reader, clipboard in hand, squinting at a holdings list like a nutrition panel, highlighting every sneak.preservative. And on the right saunters the blind buffet buyer, a plate piled high with whatever looks shiny, no idea whether it's mega cap carbs, junk bond fat, or a sprinkle of leverage spice. Uh, what management fee, you might ask? Now, Todd, I know you're a reader of the food label, AKA the prospectus, but my question for you is, which contestantIs wearing the current rally off of the April 8th lows better. The disciplined label reader who knows every calorie of risk, or the thrill seeker who grabs and gulps.
It's got to be the discipline reader to me. I mean, the thrill seeker just because we've got a really sharp rally, maybe they, maybe they've actually done better in the short term, but I, I have to imagine the discipline wins out in the long run. I don't
think so you know that.
I'll give the, I'll give the grab and go very, maybe a slight edge in the 3 months, but by the end of the year, uh, you know, those habits don't stay very well. But how does
an investor, or I know
readspectus.
Well, there is now because of AI, right? I can go on a chat GBT or any of those and say, what does the the prospectus for the XYZTF mean? Give me a summary of that. We didn't, we didn't
have it though. Would you, would you
believe it? I always have a little, I don't know, reluctance. Now the other route is if theETF issuer is good at what they're doing, they will lay everything out for you on their website. So you go to the issuer's website, you find the ETF you're interested in, and they should have a bullet point summary of what this ETF is meant to do and where it might fit within your portfolio. So you don't have to go in and read the perspectives because those are very dense documents.
I used to write them and I, I seriously, and they're, I wouldn't say they're they're on purpose obfuscating, but it's just the length itself makes things daunting and you got to repeat things at different places and it's a lot of legalese, even though they're supposed to be written in plain English. Tell me about the fees though. How do you look for a low fee ETF and not get smacked with something you're not expecting?
They'll have the fees on the website, right? This is required to have the fees, the big a spreads in there, uh, that's gonna be on top of what you pay.But I think the more you look at ETFs, the more you realize Vanguard and iShares and State Street will have the lowest fee products for what that's worth. Those are the plain vanilla core type of passive holdings, maybe Invesco too.Um, but you could also just do a Google or AI search. What are the lowest cost ETFs available for US stocks, for international stocks? Like, do you have all these tools that weren't available 20 years ago?
100%. I get, I get curious, like, if you're just picking a big tech ETF, do you just like look at total assets and pick the one with the biggest
one?
So it gets tricky. You could, but you also want to know what it's tracking because the indices have these little nuances
tracking error. We didn't.
Oh yeah, I mean, that's a whole other topic
we'll have you back.
I love to. I'd love to come back. Um, what type of index is it tracking? Uh, market cap weighted, fundamentally weighted.Um, is it actively managed by someone? So there's these nuances to the indices and how big certain stocks might be.So for most people, yes, market cap is the way to go, but maybe you need to change it up.
All right. And on that note, we got kind of wind things down here and it's been a fascinating conversation with you, Todd. We learned about exchange traded funds, how they're different from mutual funds, and especially how to dig into some of these details that are easy to miss. And one of the standouts to me in this conversation is uh diversification because I think in this market environment, it's especially important.And I like your idea of managed futures, not only because I used to be in the industry and that's how I got my start, but, uh, very important to think about these things. Time for a wrap here at Stocks and Translation, but make sure you check out other episodes of our video podcast on the Yahoo Finance site and mobile app. We're also on all your favorite podcast platforms, so be sure to like, leave a comment, and subscribe wherever you get your podcast. We will see you next time on Stocks and Translation.