How Investors Can Gain Exposure to 2024's Hottest Stock
Money is not a client of any investment adviser featured on this page. The information provided on this page is for educational purposes only and is not intended as investment advice. Money does not offer advisory services.
The tech sector has carried over its momentum from 2023, and one breakout star from last year is surging ahead in 2024. Earlier in February, Nvidia surpassed Amazon and Alphabet to become America's third-largest publicly traded company by market capitalization.
Last week, after announcing quarterly earnings and forward guidance on Feb. 21, the company added $272 billion in value the following day — the largest one-day gain ever for a publicly traded company. As a result, shares of NVDA surged nearly 20% from market close on Wednesday to market open Friday morning and are up nearly 64% so far this year.
The tech company, previously known for its graphic processing units and data center services, is leading the charge on the newest technological frontier: artificial intelligence (AI). Demand for its AI-focused products and AI enterprise bootcamp is skyrocketing, producing another revenue stream for the $2.01 trillion company.
But with shares now trading around $800 and no signs of slowing down, lots of everyday investors may feel walled off from investing. How, then, can retail investors get into Nvidia stock without putting all of their eggs into one very expensive basket? One possibility is investing in index funds that include exposure to NVDA (and a host of other stocks), with less risk compared to buying shares of an individual company.
Why is Nvidia's stock surging?
Since going public in 1999, Nvidia's stock remained an affordable tech play, trading for under $50 per share, until 2017. Since then, it and many other tech stocks have exploded thanks to the information technology sector's reemergence as the largest growth opportunity in the S&P 500. Of the index's 11 sectors, tech has finished atop the list five out of seven years since 2017.
Yet the recent growth for the broader sector pales in comparison to NVDA's gains in the last year alone. That's because in March 2023, the company released its H100 processor, an highly-praised piece of AI hardware that's sold over 500,000 units already, including sales to competitors Meta and Microsoft. And while that product retails for a whopping $30,000, the company also began rolling out its consumer-grade AI processors in early 2024.
The increasing praise of AI by investors and users alike, combined with Nvidia's role as the creator of the most cutting-edge AI processors on the market, have fueled 263.75% gains for the company's stock in the last 12 months. Naturally, investors are seeking ways to cash in on the growing success of NVDA stock, and they should consider index funds their friends.
For the everyday retail investor, NVDA's high sticker price can complicate investment plans. Many of those who want a piece of the action can't pay the thousands of dollars required to add multiple shares to their portfolios. That's where index funds and fractional shares come in.
Index funds pool investors' resources and attempt to mirror the performance of an underlying benchmark, like the S&P 500 index. By doing so, investors gain exposure to a number of stocks in a single investment vehicle without having to buy the individual stocks and pay for their high share prices. Shares of index funds can be purchased on the stock market just like NVDA shares, making for a simple transaction.
There are hundreds of index funds to choose from, many of which have NVDA among their top holdings. That's because index funds are often market-weighted, meaning they allocate investors' funds proportionally to the best performing stocks in the underlying benchmark they seek to mirror.
The SPDR Portfolio S&P 500 ETF (SPLG), for example, holds over 1.8 million shares of NVDA and trades around $60 per share. What's more, it carries an expense ratio that at 0.02% is 77% lower than the S&P 500's most popular index fund, the SPDR S&P 500 ETF Trust (SPY), meaning investors will pay much lower fees while saving hundreds on a per-share cost basis and gaining exposure to identical holdings.
There are plenty of other options for funds that contain NVDA but in slightly different weightings. Take the Vanguard S&P 500 ETF (VOO), for example, or the iShares Core S&P 500 ETF (IVV); these funds carry similarly low expense ratios to SPLG, making them, too, cost-effective alternatives to the SPY, which has an expense ratio of 0.09%.
Some investors may already hold index funds in their portfolios but still want to directly hold Nvidia despite its elevated share price. This is possible, too, thanks to fractional shares, which are what they sound like: investments that represent just a piece of a share of stock. Today, many brokerages offer fractional shares in expensive stocks like NVDA, allowing investors to gain exposure without shelling out $800 per share without requiring them to take on all of the other positions in an index fund if it's not desired.
What's next for Nvidia stock
There are never any certainties in the market. But most experts expect NVDA stock to continue its upward trajectory in the coming months, especially given the belief that AI is not a hype-induced bubble but an emerging and permanent tech segment.
"AI is a transformative technological change that will allow companies and the economies to do more with less — meaning work faster with the same infrastructure," says James Demmert, chief investment officer at Main Street Research. "It’s a very exciting sea that will likely create a super cycle of growth, profits and stock prices in the coming years. Nvidia is at the center of this."
Demmert reminds investors that Nvidia had been heating up even without the AI hype. In 2021, before Nvidia released its newest AI processors and before the tech market began its fever pitch over the technology, shares of NVDA were trading at $330. "The world has changed since then, and there is significant demand for artificial intelligence, and thus, Nvidia has plenty more room to run," he says.
More from Money:
5 Best Stock Trading Apps of 2024
Finance Giants Say 2024 Will Favor Active Investing Over Safer Passive Approaches
What's Next for Tech Stocks Now That Microsoft Has Overtaken Apple?