Artificial intelligence (AI) is top of mind for some investors at the moment, and for good reason. The technology is driving some blockbuster returns in the stock market this year, led by semiconductor giant Nvidia, which saw share prices triple in value in 2023 and push its valuation over $1 trillion. The AI industry is still very young, and more value creation is likely to come as the technology develops.
One example of how a new technology can create an incredible impact is the internet. The internet's early growth helped motivate the creation of Amazon in 1994. That company's revenue went from nothing to over $500 billion per year as it took advantage of the digital world's growth to build out its e-commerce, advertising, and cloud computing segments.
By some estimates, AI could be an even bigger motivator.
Picking the winners and losers in a fast-paced industry like AI will be extremely difficult, even for the most experienced investors. For retail investors, you might be better off making a broad bet on the sector rather than trying to find the individual stocks that will actually become the big AI winners.
Exchange-traded funds might be the best AI play
Exchange-traded funds (ETFs) are listed securities investors can buy. They hold a portfolio of stocks designed to track a major index or to give investors exposure to a specific sector of the market (or do both).
The Global X Artificial Intelligence and Technology ETF (AIQ 0.49%) owns shares in 87 different companies with a connection to the AI industry. With investors heavily focused on AI in 2023, the ETF is up an impressive 39% so far in 2023, more than double the return of the broader S&P 500 index.
Investors shouldn't expect that level of return every year, but there is an argument to be made that investing $500 per month in this AI-focused ETF could very well make you a millionaire over the long term.
NASDAQ: AIQ
Key Data Points
The Global X AI and Technology ETF holds the most popular AI names
Investors will find just about every AI stock they could ever want to own in this ETF. It holds shares in companies developing AI directly, like Nvidia and Microsoft, and those using the technology to supercharge their business models, like social media giants and cybersecurity providers.
The ETF is very top-heavy, meaning its 10 largest holdings account for 32.5% of the value of its portfolio:
|
Stock |
Global X AI and Technology ETF Weighting |
|---|---|
|
1. Alphabet (Google) |
3.48% |
|
2. Intel |
3.44% |
|
3. Amazon |
3.37% |
|
4. Cisco Systems |
3.24% |
|
5. Tesla |
3.21% |
|
6. IBM |
3.21% |
|
7. Adobe |
3.21% |
|
8. Meta Platforms (Facebook) |
3.20% |
|
9. Nvidia |
3.10% |
|
10. ServiceNow |
3.07% |
Source: Global X ETFs. Holdings are as of Sept. 16 and the weighting levels are subject to change.
An ETF so heavily weighted toward its top 10 holdings can be both a blessing and a curse. On the positive side, it's the reason the ETF has delivered such a strong return this year. Stocks like Nvidia, Amazon, Alphabet, and Meta Platforms have rocketed higher. On the negative side, if that handful of stocks suffers a decline, it can have a disproportionate downside impact on the whole ETF, even if other holdings are doing fine.
In any case, investors need to be comfortable with a certain degree of risk when betting on a new, disruptive technology like AI, because growth won't always occur in a straight line.
Here's how investing $500 a month in the Global X ETF could make you a millionaire
The Global X AI and Technology ETF has delivered a compound annual return of 13.4% since its inception in 2018. Let's be clear: Five years is a very short period of time when assessing the track record of any investment. If the ETF continues to deliver a 13.4% annual return for the next 30 years, an investment of $500 per month would be worth over $2.4 million by the end of that period! That would include $180,000 in total deposits and $2.25 million in gains.
Even if the ETF's return slows to 10% per year, which is in line with the long-term return of the S&P 500 index, $500 per month would still be worth over $1.1 million after 30 years.
Below are a few different scenarios that investors of different ages and experience levels might find useful, based on a compounded 13.4% annual return.
|
Holding Period |
$200 Per Month |
$800 Per Month |
|---|---|---|
|
10 Years |
$50,742 |
$202,969 |
|
20 Years |
$242,337 |
$969,351 |
|
30 Years |
$968,635 |
$3.8 million |
Chart by author. All dollar amounts assume a 13.4% compound annual return.
If AI really does become the next internet in terms of value creation, owning a broad cross-section of the industry is a great way to get involved without the risk that comes with picking individual winners and losers.
