Tempted to invest in NVIDIA shares? Here’s an alternative that may be just as good

Key points

• Nvidia briefly became the world's most valuable company in June, but suffered a record-breaking three-day loss in the same week

• This was arguably the AI stock's potential for volatility on full display

• We explore a more sensible for option for those looking to get in on the AI stock frenzy

With the tech giant’s share price showing exceptional volatility, an alternative path may be wise for investors

NVIDIA (NASDAQ: NVDA) shares briefly surpassed Microsoft and Apple last month to become the world’s most valuable company. However, the glory was short-lived, as the chipmaker shed 8% of its value in the days following.

Indeed, the AI gold rush, stellar earnings, a 10-for-1 split, and a doubling of dividends have helped NVIDIA shares gain almost 160% YTD. However, it cannot be ignored that the tech giant lost more than $500 billion in market capitalization over three trading sessions soon after it toppled Microsoft, brutally exposing its volatility.

For those keen to invest in NVIDIA stock but deterred by the recent onslaught, an alternative option may be the most sensible pathway.

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 $500bn 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 AMD and Intel but also with “homegrown ones” from Amazon’s AWS, Microsoft’s Azure, and Google.

Another headwind for the Silicon Valley chip maker could be the charges by the French antitrust regulator. Reuters, 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 worry, but if NVIDIA is asked to make operational changes, it could impact NVIDIA’s competitive edge and market strategy.

So what’s the alternative?

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 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 NASDAQ 100 tracker fund.

For instance, Invesco QQQ Trust 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 S&P 500 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.