In 2024, Nvidia is leading a rise in chip prices. So why are some AI stocks falling behind?

As demand for artificial intelligence (AI) grew, this was supposed to be a great year for the whole semiconductor industry. But in the first half of 2024, Nvidia Corp. has once again taken the lead, moving the stock market up while leaving other AI companies in its wake.

Nvidia NVDA, -3.22% is now the clear leader in AI. Earlier this week, it became the world’s most valuable public company, but it quickly lost that title. According to market analysts, the recent underperformance of some exchange-traded funds that deal with AI shows that Nvidia’s success hasn’t yet spread to the rest of the AI industry.

Since the beginning of the year, the Global X Robotics & Artificial Intelligence ETF BOTZ has lost 4.7% of its value. On the other hand, the VanEck Semiconductor ETF SMH, which manages nearly $24 billion and is the biggest fund in the chip industry, has gained 19.7%.

FactSet data shows that BOTZ is up 7.9% for the year, while SMH is up 51.5% and the Technology Select Sector SPDR Fund XLK, which tracks a wider range of tech stocks, is up 18.7%.

“Nvidia’s huge returns in the first half of 2024 are a boost for all of the funds,” said Todd Rosenbluth, head of research at VettaFi. “But it’s happening to a lesser extent for the AI-themed ETFs.”

Many AI-themed and tech-sector ETFs hold Nvidia’s stock as their main holding. The stock has gone up 155% so far in 2024. Nvidia makes up more than a quarter of SMH’s assets. Other chip companies that have done well are Broadcom Inc. AVGO, -4.38%, Qualcomm Inc. QCOM, -1.36%, and Micron Technology Inc. MU, -3.22%. Stats from FactSet show that shares of these companies are up 49%, 47%, and 63% this year.

While Nvidia makes up more than 13% of BOTZ, the other parts, mostly robotics and automation companies that are traded on foreign stock exchanges, haven’t done very well so far this year.

The Nvidia stock is worth 5.8% of the Global X Artificial Intelligence & Technology ETF AIQ, which has lost 4.6% in the last three months. FactSet data shows that some of its top 10 holdings are non-chip tech companies, such as Tencent Holdings Ltd. 700, -1.60%, Netflix Inc. NFLX, +1.04%, and Meta Platforms Inc. META, -1.38%.

One of the “three horsemen of AI” is Nvidia. These are the rest.

Rosenbluth said that different parts of an ETF can have a big effect on how well the fund does overall. This is why investors might benefit more from a fund’s increased exposure to Nvidia than from companies that are “not riding the same tailwinds.”

He also said that robotics-themed ETFs often have more bonds in industrial companies, which are “more tied to the overall health of the U.S. economy” and could hurt the performance of a fund.

Thematic ETFs, like BOTZ and AIQ, look for companies that will benefit from a new trend, like artificial intelligence. Sector-related ETFs, like SMH, follow companies in “a better-classified group,” even if they don’t have anything to do with a theme, Rosenbluth explained. “But you often see the strongest theme in a sector, and that theme tends to drive performance,” he said.

Dan Faggella, founder and head of research at Emerj Artificial Intelligence Research, said that Nvidia’s focus on AI in areas other than traditional tech suggests that AI applications will grow, but that doesn’t mean that “other semiconductor and tech players are growing automatically.”

Faggella told MarketWatch, “Stock prices are based on opinions and money moving in the real world. But money flows are overwhelmingly centered around Nvidia, despite all the other startups that have tried to come up.” “This [Nvidia] isn’t being stopped by anyone right now.”

Faggella also said that problems with “scale production” and “reliability” have made it nearly impossible for other smaller AI companies to achieve a return on investment.

It doesn’t matter if these new companies can make hardware that’s better than Nvidia—they can’t make enough of it for big buyers, he said. Investors also don’t want to risk their money on startups that might fail in a few years. “They want to pick Nvidia since it’s not going away.”

Check out: Not every ETF for semiconductors is the same. Before putting money into Nvidia and other chip stocks, investors need to know these things.

Though, Rosenbluth said that if investors are worried about how much Nvidia they own, the thematic and sector ETFs that are currently behind might be “better choices” than those that have 20% of their weight in one stock.

“If other companies do pretty well going forward and Nvidia stops being the leader in tech, that will hurt a market-cap weighted approach but help something that’s naturally more evenly weighted,” he said.

On Friday, most U.S. stocks went down, and Nvidia stock fell for the second day in a row. FactSet data shows that the Nasdaq Composite COMP ended the week almost flat, while the S&P 500 SPX went up 0.6% and the Dow Jones Industrial Average DJIA went up 1.5%.