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On Jan. 27, Nvidia (NASDAQ: NVDA) fell 17%, erasing over $590 billion from its market cap. It marked the greatest single-day market-cap destruction for a company in U.S. stock market history.
While the growth stock recovered nearly half of those losses the following day, there are still lessons to be learned from this historic market event.
Let’s dive into the significance of the sell-off, the risk it exposes, and how you can position your portfolio in response to this risk.
Despite massive drawdowns in Nvidia, Broadcom (NASDAQ: AVGO), Taiwan Semiconductor, and other chip stocks, Monday’s sell-off was fairly isolated.
The following chart shows the 12 largest S&P 500 (SNPINDEX: ^GSPC) components by market cap. Taiwan Semiconductor makes the cut from a market-cap perspective, but it’s excluded from the chart because it isn’t in the S&P 500 index.
As you can see, tech companies like Apple and Meta enjoyed solid gains, as did other industry leaders like Walmart and Berkshire Hathaway. In fact, the Dow Jones Industrial Average (DJINDICES: ^DJI) gained 0.7% on the day. And yet, the Invesco QQQ Trust (NASDAQ: QQQ), an exchange-traded fund (ETF) that tracks the Nasdaq-100, fell 2.9%. The Vanguard S&P 500 ETF (NYSEMKT: VOO) similarly tracks the S&P 500, and it declined 1.4%.
Despite gains for multiple stock market sectors, not to mention many individual tech stocks, the S&P 500 and Nasdaq-100 still fell sharply that day because of how massively valuable chip stocks like Nvidia have become.
You can determine the impact of an individual stock on an index (or an ETF that tracks it) by multiplying its portfolio weight by the movement in the stock price.
For example, Nvidia makes up about 7.5% of the Invesco QQQ and 6.6% of the Vanguard S&P 500 ETF. Meanwhile, Broadcom represents 4.0% and 2.2% of the holdings in those two ETFs, respectively. Given their double-digit one-day losses on Jan. 27, these two companies single-handedly brought down the Invesco QQQ 2.0% while dragging the Vanguard S&P 500 down 1.5%. In other words, just two megacap stocks accounted for the bulk of the price movement in these funds.
The sell-off in Nvidia and Broadcom showcases the risks of a top-heavy market. As jarring as this realization may be, it’s also a reminder of the importance of knowing the composition of an index fund before you invest in it, including benchmarks like the S&P 500 and Nasdaq-100. However, there are ways to counter concentration risk.
