ETFs to Play as Markets Rebound After DeepSeek Sell-Off

Wall Street staged a strong comeback on Tuesday following a steep stock sell-off triggered by concerns over Chinese startup DeepSeek and its potentially cheaper AI model's impact on Big Tech.The market turmoil stemmed earlier this week from claims by DeepSeek, a startup that has developed an AI assistant using cheaper chips and less data than existing models while delivering comparable performance.

This efficiency questioned the necessity of massive investments in cutting-edge AI accelerators, particularly those from NVIDIA. The company's rise has led investors to question the sustainability of U.S. dominance and profitability in the AI sector, particularly for companies reliant on high-end hardware.

NVIDIA Leads Tech Rally

NVIDIA NVDA emerged as the standout performer of the day, rising about 9% after suffering a record-breaking $589 billion market cap loss in the previous session. Nvidia’s rebound helped the tech-heavy Nasdaq Composite gain over 2%, reversing a significant portion of Monday's 3% decline. Meanwhile, the S&P 500climbed around 0.9%, and the Dow Jones Industrial Average added approximately 0.3%.

Tech Sector Sees Biggest Two-Day Reversal

Following its worst single-day drop since March 2020, the tech sector recorded its most significant two-day reversal in over two years, as quoted on Yahoo Finance. Stocks began recovering from Monday’s losses, which were triggered by concerns over DeepSeek’s AI model, which challenges the U.S. dominance in the industry.

This uncertainty raised investor doubts about whether chipmakers and tech giants can sustain their high earnings expectations. However, several analysts believe that the DeepSeek fears are overrated. Bernstein’s Stacy Rasgon downplayed the fears. He added that innovations like DeepSeek’s model could help free up compute capacity, which would ultimately drive further growth in AI infrastructure, as quoted on Yahoo Finance.

Futurum’s chief strategist, Daniel Newman, said that a more efficient model like DeepSeek would increase AI usage, citing an economics concept called the Jevons Paradox, as quoted on Yahoo Finance. The Jevons paradox states that increased efficiency in using a resource can result in increased consumption of that resource. Microsoft CEO Satya Nadella highlighted the same concept in a tweet, noting that greater AI efficiency would likely lead to skyrocketing usage.

A Growing Challenge for U.S. Policy

DeepSeek’s rise indicates the likely limitations of U.S. trade restrictions. Its breakthroughs highlight the possibility that China can bypass hardware constraints, raising concerns about the effectiveness of the current policies and the broader implications for U.S.-China tech competition.

Time for Tech ETFs?

As the markets have rebounded, investors can buy the semiconductor-based exchange-traded funds (ETFs) on a new-found momentum. Semiconductor ETFs include VanEck Semiconductor ETF SMH, iShares Semiconductor ETF SOXX and SPDR S&P Semiconductor ETF XSD. ETFs SMH, SOXX and XSD added about 2%, 0.5% and 0.7%, respectively, on Jan. 28, 2025.

The technology ETFs include Vanguard Information Technology ETF VGT, Technology Select Sector SPDR Fund XLK and Communication Services Select Sector SPDR Fund XLC. ETFs VGT, XLK and XLC advanced about 3.1%, 2.7% and 0.5%, respectively, on that day.

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.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

To read this article on Zacks.com click here.

Zacks Investment Research