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DeepSeek AI Fears Overrated? ETFs in Focus

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China’s artificial intelligence (AI) startup DeepSeek sparked a tech sell-off on Monday as investors reacted to fears over a cheaper, open-source large language model. Concerns about the potential impact on the AI dominance of the United States weighed heavily on markets.

The Nasdaq—100-based tech-heavy exchange-traded fund (ETF) (QQQ - Free Report) lost 2.9% on Jan. 27, 2025, due to the slump in NVIDIA (NVDA - Free Report) , whose stock plunged 16.9%, wiping out a staggering $589 billion in market value.

This downturn sent shockwaves across the broader tech sector. Key chipmakers, including Broadcom (AVGO - Free Report) , Lam Research (LRCX - Free Report) , KLA (KLAC) and Marvell (MRVL - Free Report) , also saw declines, while tech giants Microsoft (MSFT) and Alphabet (GOOGL - Free Report) slid 2% and 4%, respectively.

SPDR S&P 500 ETF Trust (SPY - Free Report) has lost 1.4% on that day while SPDR Dow Jones Industrial Average ETF Trust (DIA - Free Report) — due to its lesser tech exposure than the other two — added 0.7%. Investors are closely monitoring guidance of the big tech companies on future revenue and profit amid concerns about DeepSeek's disruptive potential.

Chinese AI Startup Sparks Market Jitters

The market turmoil stems from claims by China's DeepSeek, a startup that has developed an AI assistant using cheaper chips and less data than existing models while delivering comparable performance. This efficiency questions the necessity of massive investments in cutting-edge AI accelerators, particularly those from NVIDIA.

DeepSeek distinguishes its AI assistant by articulating reasoning before delivering responses and claims that its R1 model rivals the performance of leading AI systems. The company has licensed the model for developers to build their own AI applications.

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.

Wall Street Reacts to AI Infrastructure Concerns

The sell-off came as Wall Street already anticipated slower growth in the sector, with profit expansion for major tech companies expected to drop to 22% in the fourth quarter, the slowest in nearly two years. Despite the grim outlook, some analysts believe the market's reaction may be exaggerated.

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 will 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 current policies and the broader implications for U.S.-China tech competition.

Buy the Dip in Chip ETFs?

The above-mentioned exaggerated fears may open up buying opportunities in the semiconductor or chip ETFs. Plus, Big tech stocks and ETFs can also be bought on the dip. Semiconductor ETFs include VanEck Semiconductor ETF (SMH - Free Report) , iShares Semiconductor ETF (SOXX - Free Report) and SPDR S&P Semiconductor ETF (XSD - Free Report) .

The technology ETFs include Vanguard Information Technology ETF VGT, Technology Select Sector SPDR Fund (XLK - Free Report) and Communication Services Select Sector SPDR Fund XLC.

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