If you've scrolled social media, turned on your TV, or read any business-related news in 2023, there's a great chance you've encountered the artificial intelligence (AI) hype and momentum. It seems inescapable at this point.
AI isn't new, though. Companies have been using it for years. Amazon has been using it to tailor the products it recommends for you; CrowdStrike has been using it for cybersecurity; and Tesla has been using it to develop autonomous driving.
However, it went mainstream with the November 2022 release of OpenAI's ChatGPT. In just two months after its release, ChatGPT had jumped to over 100 million monthly active users, making it the fastest-growing app in history at the time. Meta Platforms' Threads has since passed it, but it's hard to compare an app starting from scratch to one that easily lets users migrate from its existing platform of over 2 billion people.
Image source: Getty Images.
Luckily, in the race to capitalize on AI's potential, you don't have to pick a leader from the bunch. Diversified ETFs containing AI companies can help you make money off the AI demand just right.
Focus on the companies that will be key in driving AI forward
There are inherent risks when you invest in any individual company; there's no sidestepping that. There's also inherent risk when focusing on a specific industry like AI. The route I prefer is going with an exchange-traded fund (ETF) that lets you cover a lot of ground at once.
The Global X Robotics & Artificial Intelligence ETF (BOTZ 1.96%) is a popular ETF that focuses on companies it describes as potentially benefiting from the "adoption and utilization of robotics and AI." Containing 43 companies, BOTZ is just diversified enough to provide a glimpse of AI exposure, but it's missing a lot of top players. Its top five holdings, as of Thursday market close, are:
- Nvidia: 13.1%
- Intuitive Surgical: 9.6%
- ABB: 8.3%
- Keyence: 7.0%
- Fanuc: 6.0%
Considering the AI landscape, it seems misguided not to include Microsoft, Amazon, Meta, and other big tech companies in an ETF that supposedly has an AI focus. An investment in an S&P 500 ETF could be just the right exposure an investor needs.
An S&P 500 ETF can provide good AI exposure
An S&P 500 ETF can check off many investment boxes at once. First, let's take the Vanguard S&P 500 ETF (VOO 1.53%), whose top five holdings are:
- Apple: 7.67%
- Microsoft: 6.77%
- Amazon: 3.11%
- Nvidia: 2.80%
- Alphabet: 1.90%
Representing over 22% of the ETF, these companies are sure to be part of the leaders in the AI revolution. Apple's AI plans have been kept close, but you can rest assured it's brewing up something. The other four companies have well-documented AI moves and ambitions already in place.
NYSEMKT: VOO
Key Data Points
You can get similar exposure to big tech with a Nasdaq-focused ETF like the Invesco QQQ ETF, but the S&P 500 also includes companies in the financial sector, which stands to gain a lot from AI development and push it forward. Financial institutions are implementing AI to help with fraud prevention and detection, non-traditional credit scoring, portfolio management, compliance, and more. The list goes on.
The Vanguard S&P 500 ETF can ensure you're getting broad exposure to AI in different sectors. Here's how the ETF is broken down:
- Communication services: 8.4%
- Consumer discretionary: 10.6%
- Consumer staples: 6.7%
- Energy: 4.1%
- Financials: 12.4%
- Health care: 13.4%
- Industrials: 8.6%
- Information technology: 28.3%
- Materials: 2.5%
- Real estate: 2.4%
- Utilities: 2.6%
Don't let the hype completely consume you
There's no doubt the potential of AI is immense. Still, on the investment side, it's important to go at it with a level head and not get swept up in the hype. It's much easier said than done when you see the surges of AI-related stocks this year, but it's crucial.
Many tech booms have come with unrealistic expectations and eventual market corrections. By no means is that to say AI will be the same (it has more utility than fads like NFTs), but you don't want to leave yourself too vulnerable by going all in on it.
Give yourself a chance to gain from the industry's growth while also keeping in mind that diversification is a fundamental principle of investing for a reason. The future looks promising with AI, but make sure it's only part of a well-rounded portfolio.
