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Why Active Investing? Just Look at Nvidia
On Tuesday, June 18, chip giant Nvidia closed as the world’s most valuable company for the first time in its history1. This move pushed its valuation above that of Microsoft and Apple, which it had previously trailed. Nvidia’s 43rd record closing1 sent shock waves through the tech industry as it forces a rebalancing in one particular index fund.
Of large-cap sectors in the S&P 500 represented by ETFs, the $70 billion Technology Select Sector SPDR XLK ETF has been the top performer this year. It contains Microsoft, Apple, Nvidia and many other high performing tech companies. Prior to Nvidia’s record close, Nvidia only made up a weighted 6% of the XLK while Microsoft held 22% and Apple held 20%. But the rebalancing of the XLK ETF is anticipated to cause Apple and Nvidia to swap places, leaving Nvidia with 20% and Apple with only 5%. Microsoft will retain 23% of the index weight1.
This shift will have affected two very different types of investors in two very different ways. Investors who take an active approach to their portfolios have seen this rebalancing coming for some time. And because of this active involvement, they are likely not caught off guard and have been able to prepare for this moment. Passive investors, on the other hand, are very likely to have been surprised by this shift.
Passive investing2 aims for large long term returns by minimizing buying and selling. It assumes the market is positive over time, but passive investing is unlikely to outperform the market. Passive investing is predicated on the idea that risk is managed through diversification, making passive investing theoretically safer than a fund or index dominated by a handful of stocks. However, there is a different type of risk that passive investing accepts, which is the risk of missing out on big gains when only a few names dominate the market, as has been the case for the past several years.
By contrast, active investors2 take on higher risk by buying and selling more frequently. They watch markets and specific companies rather closely with the aim of outperforming the market.
Even with its recent dip, Nvidia’s 2024 return is over 150%. The active investing strategy at TrueMark has meant that portfolio managers of the Technology, AI, and Deep Learning ETF (LRNZ) have been watching Nvidia climb its way to the top for years. Active investing does what passive investing can’t. It has empowered fund managers to give Nvidia more weight over time and actively adjust the concentrated portfolio for both diversification and returns.
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