Artificial intelligence (AI) has captivated investors in 2023, primarily because it's driving substantial gains in several stocks that have become synonymous with the technology: 

  • Nvidia stock has soared 207% this year.
  • Tesla stock has gained 141%.
  • C3.ai has jumped 117%.

But it hasn't always been smooth sailing for those names. Last year, for example, Tesla stock plunged 65%, and C3.ai stock is still trading 85% below its all-time high set three years ago. Those downturns would be enough to make even the most seasoned investors wince, so what if there was a way to own a slice of the AI revolution with a fraction of the risk?

An exchange-traded fund might be the answer

An exchange-traded fund (ETF) is an investment vehicle that holds a portfolio of stocks, and it's neatly packaged into one single security. An ETF can give investors exposure to a specific sector of the stock market; instead of buying 20 (or more) individual AI stocks, for example, they can simply buy one fund and theoretically get a similar result. 

The iShares Robotics and Artificial Intelligence Multi Sector ETF (ARTY 1.29%) is a great option for investors looking for a diversified way to play the AI boom. The ETF holds shares in 113 different companies around the world, all of which have some involvement in AI technology

The fund has delivered a return of 17% this year, which beats the 11.5% gain in the benchmark S&P 500 index. Here's why it might continue to outperform in the long run. 

IRBO ETF exposes investors to several areas of the AI industry

As I mentioned, the IRBO ETF holds 113 different stocks, which is more than most other funds with an AI focus. It's a relatively balanced fund because its largest holding only accounts for 1.61% of the value of its entire portfolio, so it isn't heavily weighted toward any particular group of stocks. 

There are several stocks in the ETF's top 10 holdings that might be unfamiliar to investors. For example, its largest position is Meitu, a Chinese company that has developed an AI-powered camera editing application. Its second and third largest holdings are fabless semiconductor companies Faraday Technology and AIchip Technologies, respectively. In fact, the only two stocks in the IRBO ETF headquartered in the U.S. are fuboTV and Splunk. The latter is a machine learning powerhouse that will soon be acquired by Cisco Systems.

With that said, the IRBO ETF does hold many of the popular names investors associate with AI:

Stock

iShares Robotics and Artificial Intelligence Multi Sector ETF Weighting

Alphabet (Google)

1.08%

Nvidia

1.05%

Amazon

0.95%

Microsoft

0.89%

Snowflake

0.81%

Advanced Micro Devices 

0.80%

Data source: iShares. Portfolio weightings as of Oct. 5, 2023.

The ETF also holds a stake in popular companies using AI to serve customers, even if it isn't a core part of their business. Meta Platforms and Spotify are great examples. That's positive for another reason: Those companies are successful even without AI, so if the technology doesn't live up to the hype, holding those stocks can help reduce risk overall for the ETF. 

Two halves of a digital brain connected by an AI chip in the center.

Image source: Getty Images.

IRBO ETF can deliver steady returns without the risk of individual AI stocks

Since the IRBO ETF was established in June 2018, it has delivered a compound annual return of 7%. That's actually a smaller return than the S&P 500 index, which has grown at a compound annual rate of 9.4% over the same period. 

However, as I touched on at the top, the ETF is comfortably outperforming the benchmark index in 2023. AI technologies have only just started flourishing this year, so the next five years might look far more positive for IRBO than its first five. Its recent strength could be the beginning of a long-term trend.

It's important for investors to remember that not all AI companies will survive. After all, AOL faded into irrelevance after the dot-com internet boom, and despite MySpace once dominating the social media industry, it was pushed aside by newer platforms like Facebook and Instagram. 

The benefit of owning such a diversified ETF is that investors don't need to pick individual winners and losers -- and the losers can be extremely costly when it comes to a new technology like AI, because they could deliver full and complete capital losses.

As a result, the IRBO ETF is a great way to make money from the success of AI while keeping the risks in check.