Nvidia Too Hot? Here’s How to Ride the AI Wave With Lesser Risk

NVIDIA’s Volatile Nature

NVIDIA shares gained almost 200% on June 18 (Tuesday) to become the world’s most valuable company. However, in stark contrast, the following week saw the firm suffer the greatest three-day value loss in stock market history.

This volatility in NVIDIA stock is expected to continue for some time, with experts arguing that the stock’s steep climb makes it vulnerable to further profit-taking.

June’s $500 billion sell-off also raised concerns about NVIDIA being overvalued. Several analysts, including financial research strategist Jim Reid of Deutsche Bank, warned of “signs of over-exuberance” in relation to the AI stock.

Rising competition is another factor that could drive volatility in NVIDIA shares. Patrick Moorhead, Moor Insights & Strategy founder and CEO, told Yahoo Finance that NVIDIA is competing not just with “merchant silicon providers” like and , but also with “homegrown ones” from ’s AWS, Microsoft’s Azure, and .

Another headwind for the Silicon Valley chip maker could be the charges by the French antitrust regulator. , in a recent report citing sources familiar with the matter, noted that the French antitrust regulator will charge the chip maker for anti-competitive practices.

If the charges stand up, NVIDIA could face monetary fines and may have to alter its business practices. Financial penalties may not be of much concern, but if NVIDIA is asked to make operational changes, it could impact NVIDIA’s competitive edge and market strategy.

So, What’s the Alternate?

Investing in a high-growth stock like NVIDIA comes with a certain amount of risk. If you can stomach this, you can invest directly in the stock. But if not, there are other ways to get in on the AI stock frenzy, and chief among them is opting for an index fund.

Index funds are passive investments that are designed to mimic (not outperform) the stock market. Investors who are less bullish but willing to bet on the future of AI can still profit from NVIDIA’s meteoric rise by investing in a tech-focused index fund, such as a tracker fund.

For instance, tracks the Nasdaq-100 index, which itself tracks the 100 biggest stocks listed on the NASDAQ. It is a growth-focused index fund heavily weighted toward the technology sector. NVIDIA is Invesco QQQ Trust’s third biggest holding (7.56%), with Microsoft (8.51) and Apple (8.19%) being the first two.

The Invesco QQQ Trust has returned about 170% over the past five years, or about 22% annually. This fund has outperformed the in the past and is likely to beat it in the future as well. During the last two decades, the Invesco QQQ Trust has compounded 14.6% annually, compared to 10.3% for the S&P 500 during the same period.

Investing through such funds comes with a fee. The Invesco QQQ Trust, for instance, has an expense ratio of 0.2%. It means you pay $20 per year for every $10,000 invested. Still, index funds are a good option for risk-tolerant investors who want to reduce their exposure to volatile investments such as NVIDIA shares.