U.S. Markets close in 4 hrs 42 mins

Bet on NVIDIA's Largest-Ever Deal With These ETFs

Sweta Killa

In another wave of consolidation in the semiconductor space, graphics-chip specialist NVIDIA NVDA won a bidding war, outdoing rivals like Intel Corp. INTC, Microsoft MSFT and Xilinx, for high-performance-computing equipment maker Mellanox Technologies.

NVIDIA will pay $6.9 billion or $125 per share in cash for Mellanox, a 14% premium to the Mar 8 closing price of $109.38. The deal has been approved by both companies’ boards of directors and is expected to close by the end of calendar year 2019, subject to regulatory approvals as well as other customary closing conditions, including the approval by Mellanox shareholders of the merger agreement.

The deal represents the largest-ever acquisition in NVIDIA’s two-decade plus history as a public company. It indicates a strategic shift toward cloud computing after NVDA share crash at the end of last year triggered by a fading cryptocurrency craze and slowing sales of its computer game graphics chips. The combination will help the graphics chipmaker to expand into the growing market for data center and artificial intelligence (AI) components (read: ETFs to Buy as NVIDIA Jumps on Solid Revenue Outlook).

As the emergence of AI and data science is fueling demand for the world’s datacenters, NVIDIA will require holistic architecture that connect a vast numbers of fast-computing nodes over intelligent networking fabrics to form a giant datacenter-scale compute engine.

The transaction, when completed, is expected to be immediately accretive to NVIDIA’s non-GAAP gross margin, non-GAAP earnings per share and free cash flow.

Market Impact

Following the announcement of the deal, shares of NVDA jumped nearly 7% to close the day and crushed its average volume as nearly 21.5 million shares moved hands compared with 16.4 on average. Currently, NVIDIA has a Zacks Rank #5 (Strong Sell) and VGM Score of D. Moreover, it falls in a bottom-ranked Zacks industry (bottom 6%). However, we are expecting an upgrade in the rank of this chip-maker owing to the biggest-ever acquisition, which will bolster its business of making chips for data centers (see: all the Technology ETFs here).

Given this, investors could capitalize the opportune moment with ETFs having higher allocation to this graphics chipmaker. Below we have highlighted some of them:

ARK Industrial Innovation ETF ARKQ

This is an actively managed ETF seeking long-term capital appreciation by investing in companies that benefit from the development of new products or services, technological improvements and advancements in scientific research related to energy, automation and manufacturing, materials, and transportation. This approach results in a basket of 35 stocks, with NVDA occupying the fourth spot holding 8.9% share. The product has accumulated $169.6 million in its asset base and charges 75 bps in fees per year. It sees lower volume of about 33,000 shares a day.

VanEck Vectors Video Gaming and eSports ETF ESPO

This fund offers exposure to global companies involved in video game development, e-sports, and related hardware and software by tracking the MVIS Global Video Gaming and eSports Index. Holding 25 stocks in its basket, NVIDIA takes the second spot with 7.9% share. American firms account for one-third of the portfolio while Japan, China and South Korea round off the next three with double-digit allocation. The fund has gathered $13.1 million in its asset base while trading in average daily volume of 7,000 shares. It charges 55 bps in annual fees from investors (read: Video Gaming Stocks in Red, Are ETFs Relatively Safe?).

iShares PHLX Semiconductor ETF SOXX

This ETF offers exposure to 30 U.S. companies that design, manufacture and distribute semiconductors by tracking the PHLX SOX Semiconductor Sector Index. Of these, NVDA takes the fourth spot with 7% allocation. The fund has amassed $1.1 billion in its asset base and charges a fee of 47 bps a year. It trades in solid volume of 805,000 shares and has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

ARK Web x.0 ETF ARKW

This is an actively managed fund focusing on companies that are expected to benefit from the shift in technology infrastructure to the cloud, enabling mobile, new and local services. The fund holds 37 stocks in its basket, with NVIDIA occupying the top position at 7.7%. The ETF has amassed $477.5 million in its asset base and trades in a good average daily volume of around 145,000 shares. Expense ratio comes in at 0.75%.

VanEck Vectors Semiconductor ETF SMH

This ETF has AUM of $830 million and average daily volume of about 7.1 million shares. The fund provides exposure to 25 global securities by tracking the MVIS US Listed Semiconductor 25 Index. NVIDIA occupies the sixth spot with 5.2% of the assets. While American firms dominate the fund’s holdings with 80.5% assets, the Netherlands (8.6%), Taiwan (8.8%) and Switzerland (2%) round off the top four in terms of country exposure. The fund charges an expense ratio of 0.35%. It has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: 4 ETFs to Invest in Soaring Semiconductor Stocks).

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>