Artificial intelligence (AI) could have a greater impact on society and the economy than the internet or the smartphone. It's still early days, but the technology has already showcased its ability to answer almost any question posed by users, and it can also generate text, photos, videos, and computer code on demand.
Those capabilities could drive a productivity boom for businesses that could be worth a whopping $200 trillion to the global economy by 2030, according to Cathie Wood's Ark Investment Management.
Investors are incredibly excited about the potential of AI, and they have sent many stocks in the sector surging in 2023. Semiconductor giant Nvidia stock has rocketed 227% year-to-date, and small AI software company C3.ai has seen a 128% gain in its stock.
But picking the long-term winners and losers in this emerging industry won't be easy, and investors who try will probably endure significant volatility in the coming years. With that in mind, there might be a better way to invest in the future of AI.
Image source: Getty Images.
Exchange-traded funds might be the best choice for investors
An exchange-traded fund (ETF) can hold dozens -- or even hundreds -- of individual stocks to give investors exposure to a specific sector of the market. Therefore, rather than investors picking several different AI stocks, they can buy one or two ETFs instead and own a cross section of the entire industry.
Below, I'm going to share one AI-focused ETF and one semiconductor ETF that should help investors ride the AI wave without the risks that come with picking individual winners and losers.
1. Global X Artificial Intelligence and Technology ETF
The Global X Artificial Intelligence and Technology ETF (AIQ 2.93%) was established in 2018, and it currently holds a portfolio of 87 stocks.
It includes all the big names developing AI directly, like Microsoft, Amazon, and Nvidia, which are very popular among investors. But it also features many companies using AI to better serve customers, like cybersecurity providers and social media organizations.
The ETF is heavily weighted toward its top 10 holdings, which account for 32.6% of the entire portfolio's value:
|
Stock |
Global X AI and Technology ETF Weighting |
|---|---|
|
1. Alphabet (Google) |
3.63% |
|
2. Meta Platforms (Facebook) |
3.45% |
|
3. Intel Corp |
3.36% |
|
4. Adobe |
3.28% |
|
5. Nvidia |
3.26% |
|
6. IBM |
3.20% |
|
7. Cisco Systems |
3.16% |
|
8. Amazon |
3.14% |
|
9. Tesla |
3.13% |
|
10. Accenture PLC |
3.07% |
Data source: Global X ETFs. Holdings are as of Oct. 11, 2023, and the weighting levels are subject to change.
The heavy weighting of the above stocks has driven the ETF to a 38% gain in 2023, which is almost triple the 14% return of the benchmark S&P 500 index. But that portfolio concentration also comes with risks, because if AI stocks fall out of favor, the ETF will likely underperform the broader market.
However, companies like Alphabet, Adobe, Meta Platforms, and Amazon have booming businesses even without AI, so that will likely reduce some of the downside in this ETF if AI doesn't live up to the hype.
Investing in an emerging industry like AI can never be risk free, but the Global X AI and Technology ETF eliminates the pressure on investors to pick individual winners and losers.
NASDAQ: AIQ
Key Data Points
2. iShares Semiconductor ETF
AI is developed, trained, and deployed in centralized data centers, so semiconductor hardware is the beating heart of the technology. Nvidia is the leader in that field, and its CEO Jensen Huang says there is $1 trillion worth of existing infrastructure that needs to be upgraded to support accelerated computing and AI.
Naturally, Nvidia isn't the only chip company racing to capture a slice of that enormous pie. The iShares Semiconductor ETF (SOXX 2.26%) is filled with 30 stocks that could contribute to the AI industry over the long-term.
Like the Global X ETF, this ETF is quite concentrated, with its top five holdings accounting for 37% of the portfolio's value:
|
Stock |
iShares Semiconductor ETF Weighting |
|---|---|
|
1. Advanced Micro Devices |
8.63% |
|
2. Broadcom Inc |
7.79% |
|
3. Nvidia |
7.77% |
|
4. Intel Corp |
6.75% |
|
5. Texas Instrument |
6.11% |
Data source: Blackrock, iShares. Holdings are as of October 11, 2023, and the weighting levels are subject to change.
The iShares Semiconductor ETF has delivered a return of 41% in 2023, which beats the S&P 500 and the Global X ETF. While elevated inflation and rising interest rates have crushed demand in consumer segments like personal computing and gaming, the AI segment of the chip industry has been incredibly strong this year. With such a heavy weighting toward stocks like Nvidia and AMD, it's no surprise this ETF has outperformed.
Data center chips designed for AI workloads will likely make up a greater share of revenue at leading chip companies, which could drive a major growth cycle across the industry -- especially if Cathie Wood and Ark Invest are correct about the long-term financial potential of AI.
Despite the strong gain in the iShares Semiconductor ETF this year, it's still trading at a modest price to earnings (P/E) ratio of 22.9, which is 21% cheaper than the Nasdaq-100 index, which trades at a P/E ratio of 29.2.
Therefore, not only is this ETF a great way for investors to play the AI revolution, but it also trades at an attractive valuation right now.
