Billionaires sell Nvidia shares and buy an index fund whose price could rise by 43%, according to a Wall Street analyst
Artificial intelligence has been the dominant investment theme over the past two years. NVIDIA has stolen the spotlight. The company has reported triple-digit revenue growth over the past five quarters, and shares have increased more than sevenfold since January 2023, making it the best-performing stock in the S&P500 (SNPINDEX: ^GSPC) during this period.
However, artificial intelligence is not the only topic that investors should explore. The hedge fund managers listed below (all billionaires) sold Nvidia shares in the second quarter and bought shares of the iShares Russell 2000 ETF (NYSEMKT: IWM), an index fund that tracks small-cap Russell-2000.
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Ken Griffin of Citadel Advisors sold 9.2 million shares of Nvidia, reducing his holdings by 79%. He also bought 125,383 shares of the iShares Russell 2000 ETF (exchange-traded fund), increasing his position by 27%.
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David Shaw of DE Shaw & Co. sold 12.1 million shares of Nvidia, reducing his stake by 52%. He also bought 638,084 shares of the iShares Russell 2000 ETF, increasing his position by 169%.
Importantly, Ken Griffin and David Shaw lead the best-performing hedge funds, measured by net profits since their inception. None of the fund managers have closed their positions in Nvidia, so we can’t assume they’ve lost confidence in the chipmaker. But we can assume they’re bullish on small-cap stocks.
Tom Lee, head of research at Fundstrat Global Advisors, shares this optimistic forecast. In January, he told CNBC that the Russell 2000 could end the year above 3,000, up 43% from its current level of 2,091, suggesting identical gains for shareholders of the iShares Russell 2000 ETF.
Investors should know this.
Arguments for small-cap stocks
The Russell 2000 Index measures the performance of about 2,000 small-cap U.S. stocks, which represent 5% of the domestic stock market by total value. The median market capitalization of Russell 2000 companies is about $1 billion. For comparison, the S&P 500 is a large-cap index and the median market capitalization is $33 billion.
Tom Lee is bullish on small-cap stocks for two reasons. First, small-cap stock valuations are at their lowest levels in decades relative to large-cap stocks. Second, small-cap companies are more sensitive to interest rates, so they will benefit more from Fed rate cuts than large-cap companies.
As for the reviews, JPMorgan Chase & Co. Strategist Michael Cembalest recently wrote, “Small-cap stocks are at their lowest levels in the 21st century, with potential market and political catalysts working in their favor.” However, he also noted that small-cap companies are more likely to have lower margins and negative earnings than large-cap companies.
As for interest rates, small-cap companies rely more heavily on floating-rate debt, which is debt with a variable interest rate tied to a specific benchmark, often the federal funds rate. So when the Federal Reserve lowers its benchmark interest rate, floating-rate debt becomes cheaper. “Small-cap companies tend to take on more floating-rate debt, and so lower interest rates are very helpful,” said Sonu Varghese of the Carson Group.
Importantly, the market expects the Federal Reserve to begin cutting interest rates at its meeting later this month.
The iShares Russell 2000 ETF
The iShares Russell 2000 ETF allows investors to spread their capital across the Russell 2000 Index, giving them diversified exposure to around 2,000 small-cap companies. The index fund’s 10 largest holdings are listed below by weighting:
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Vaxcyte: 0.5%
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FTAI Aviation: 0.5%
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Insmed: 0.4%
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Sprouts Farmers Market: 0.4%
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Ensign Group: 0.3%
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Fabrinet: 0.3%
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Fluorine: 0.3%
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Halozyme Therapeutics: 0.3%
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Mueller Industries: 0.3%
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Applied industrial technologies: 0.3%
The small-cap Russell 2000 index has consistently underperformed the S&P 500 over the past five, ten and twenty years, and the underperformance has often been extreme. For example, over the past decade, the Russell 2000 has returned 105%, an annual return of 7.4%. The S&P 500, on the other hand, has returned 224%, an annual return of 12.4%.
The iShares Russell 2000 ETF has a reasonable expense ratio of 0.19%, meaning that annual fees total $1.90 for every $1,000 invested in the fund. For comparison, the average expense ratio of all U.S. index funds was 0.36% in 2023, according to Morningstar.
Bottom line: Patient investors should consider buying a small position in the iShares Russell 2000 ETF today. The index fund could soar if the Federal Reserve starts cutting interest rates and small-cap stocks trade at historically cheap valuations.
However, shareholders should not expect a 43% return by year-end. In addition, investors who own the iShares Russell 2000 ETF should consider balancing their portfolio with an S&P 500 index fund. The Russell 2000 could potentially outperform the S&P 500 in the future, but experience shows that this result is unlikely to be sustained over long periods of time.
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JPMorgan Chase is a promotional partner of The Ascent, a Motley Fool company. Trevor Jennevin has positions in Nvidia. The Motley Fool has positions in JPMorgan Chase and Nvidia and recommends them. The Motley Fool recommends Sprouts Farmers Market. The Motley Fool has a Disclosure Policy.
Billionaires are selling Nvidia shares and buying an index fund that could rise 43%, according to a Wall Street analyst. This article was originally published by The Motley Fool.
