AI-themed ETFs plunge in wake of DeepSeek news

The recent announcement by Chinese startup DeepSeek about its breakthroughs in artificial intelligence (AI) has sent shockwaves through the financial markets, particularly impacting AI-themed exchange-traded funds (ETFs). Here’s a detailed look at the events and their implications.

The DeepSeek announcement

On January 27, 2025, DeepSeek revealed its latest AI models, which it claims are on par with or even surpass industry-leading models in the United States, but at a significantly lower cost. According to Reuters, the training of DeepSeek-V3 required less than $6 million worth of computing power from Nvidia H800 chips, a fraction of what is typically spent on similar projects.

Market reaction

The news triggered a sharp decline in the prices of ETFs with significant exposure to Nvidia and other AI-related stocks.

ETF performance

The GraniteShares 2x Long NVDA Daily ETF, which offers double the daily gain of Nvidia, plummeted by 32.5% on the day of the announcement. Its leveraged inverse counterpart, which gains from Nvidia’s losses, soared by 31%.
The ProShares Ultra Semiconductors ETF, which targets a return double that of the Dow Jones U.S. Semiconductors Index and has over 40% of its assets in Nvidia, tumbled by 24.43% by midday on Monday.
The Vanguard Information Technology Index Fund, which has Nvidia as its second-largest holding, traded down by 4.7% by midday.
The VistaShares Artificial Intelligence Supercycle ETF, with a smaller exposure to Nvidia, lost about 7% by midday.

Impact on Nvidia

Nvidia’s share price itself tumbled nearly 17% by midday on Monday, reflecting the broader market’s concern about the potential disruption caused by DeepSeek’s AI models.

Reasons behind the reaction

Competitive threat

DeepSeek’s AI Assistant, powered by DeepSeek-V3, has overtaken ChatGPT to become the top-rated free application on Apple’s App Store in the United States. This sudden rise has raised concerns about the competitiveness of U.S. AI companies, with some labeling it a “Sputnik moment” for the U.S. AI industry.

Cost efficiency

The efficiency and cost-effectiveness of DeepSeek’s AI models have raised questions about the sustainability of near-term growth in AI semiconductor manufacturers. The huge performance/cost gains achieved by DeepSeek could potentially reduce the need for massive datacenter capital expenditures, which have been a significant factor in the early phase of the AI revolution.

National security concerns

There are also national security concerns associated with DeepSeek, as it is a Chinese company that collects and stores U.S. user data in China. This has sparked concerns similar to those that led to the crackdown on TikTok, with U.S. officials highlighting the need to address these issues.

Expert opinions

Market strategists

Kristina Hooper, Chief Global Market Strategist at Invesco, noted that the market’s reaction reflects the high valuations and massive expectations surrounding U.S. tech stocks. She emphasized that this is not a time for knee-jerk reactions and that more information is needed to determine the long-term impact of DeepSeek’s announcement.
Justin Leverenz, Chief Investment Officer of Developing Markets Equities at Invesco, highlighted the potential benefits of DeepSeek’s model efficiency gains, which could lead to lower inference costs and increased adoption of AI. However, he also warned about the potential air pocket for companies that have heavily invested in datacenter capex.

ETF analysts

Bryan Armour, ETF analyst at Morningstar, pointed out that the volatility in these ETFs is what retail traders and speculators are looking for. He noted that while some investors might shy away from these ETFs after a bad experience, they will likely be replaced by others.

Long-term implications

Innovation and competition

The rapid growth and innovation in AI are expected to continue, with the market sorting out potential winners and losers over the coming months and years. Adam Patti, co-founder and CEO of VistaShares, emphasized that innovation and competition in such a dynamic field are not surprising and that the market will adjust accordingly.

Cost and accessibility

DeepSeek’s model could make AI more accessible at a lower cost, potentially benefiting companies that were previously constrained by the high costs of training generative AI models. This could lead to more widespread adoption of AI in various sectors, including smartphones and computers.

Regulatory scrutiny

The incident has also highlighted the need for regulatory scrutiny, particularly regarding data security and national security concerns. U.S. officials are working to address these concerns, ensuring that the United States maintains its leadership in AI while safeguarding national interests.

In conclusion, the impact of DeepSeek’s AI models on AI-themed ETFs and the broader tech market is significant, reflecting both the competitive and cost-efficiency challenges posed by this new technology. As the market continues to sort out the winners and losers, it is clear that the landscape of AI is undergoing a profound transformation.