Active funds in the United States have struggled to outperform the broader market, with NVIDIA (NVDA, Financial) identified as a significant factor. Despite being the most-held semiconductor stock by active funds, with a holding rate of about 70%, NVIDIA's relative weighting is deemed "low." This underweighting is a pivotal reason for the funds' underperformance against the market this year.
NVIDIA's shares surged recently, hitting an intraday high of $124.26 and closing at $122.8, marking a 3.32% gain. Some may assume that fund managers are heavily invested in NVIDIA, potentially needing to trim their exposure as prices rise. However, when compared to its weighting in the S&P 500 index, many large tech companies boast a higher presence in active funds.
Bank of America Global Research analyst Vivek Arya and his team conducted a quarterly review of semiconductor holdings in active funds. Their findings revealed NVIDIA has a relative weight of 0.99 times, significantly lower than the top 16 peers in the information technology and communication services sectors, despite NVIDIA's sales growth potential being over five times greater than some of these companies.
Companies with higher weightings than NVIDIA include Meta, Salesforce, Microsoft, and Alphabet. In the semiconductor industry, firms like Applied Materials, KLA, and Micron Technology also have higher relative weightings. This underrepresentation of NVIDIA has contributed to the active funds' inability to beat the broader market this year.
While investors and analysts had high hopes for active funds in 2024, they once again lagged behind the market. Although large U.S. active funds have averaged a net growth of 20% this year, they trail the S&P 500 index's 22.1% return, including dividends, by 2.1%. This margin represents the largest underperformance since 2019.
This trend is partly due to the strong performance of large-cap stocks, which active funds typically underweight to avoid mirroring the index's top holdings. Additionally, the exceptional performance of specific sectors can distort the annual results of active funds.
The primary factor in the 2024 underperformance isn't a particular sector or even large-cap stocks, but NVIDIA alone. Since peaking in June, NVIDIA's stock has fluctuated significantly, currently down about 13% from its high. Active fund managers are hoping for NVIDIA's stock to decline further while the broader market remains strong.
