It's no secret that artificial intelligence (AI) stocks have captivated investors this year.
The launch of OpenAI's ChatGPT a year ago was a watershed moment for generative AI technology, showing the world what large language models are capable of. Since then, investors have been bidding AI stocks like Nvidia, Microsoft, and Alphabet higher, and tech stocks in general have outperformed the market due in large part to optimism about AI.
However, while most tech CEOs believe generative AI will be a disruptive technology, picking the right AI stocks isn't so easy. After all, even if the technology is disruptive, there will likely be more losers than winners. Investors only need to look back at the dot-com bust to be reminded of how difficult it is to pick winners in an emerging technology. Plenty of companies went bankrupt when the bubble burst, and even early leaders like America Online (AOL), Netscape, and Yahoo! turned out to be bad investments over the long run.
Other innovative breakthroughs in industries like automobile and aviation have produced only a few stock market winners as well, as legendary investor Warren Buffett has pointed out on a number of occasions. Luckily, there is a better way to invest in the top AI stocks than simply trying to pick winners at this early stage.
Image source: Getty Images.
The automated way to AI investing
Exchange-traded funds (ETF) are an easy way to diversify your holdings as an investor. Through an ETF, you can own multiple stocks through just one ticker, meaning you don't have to monitor so many individual stocks -- the ETF does the work of rebalancing the portfolio for you.
If you're looking for an index that tracks the top AI stocks, there's no better option than the Nasdaq-100, which owns the 100 largest stocks on the Nasdaq Composite with most of its value coming from the tech sector. The weighting of the Nasdaq-100 changes over time because, like the S&P 500, the weights of components are based on market cap, but the "Magnificent Seven" stocks -- Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta Platforms -- make up close to 50% of the index's value. What you'll notice about that list is that all of those stocks have significant exposure to AI, and make up the leading innovators in the sector.
The Nasdaq-100 also has a long track record of outperforming the S&P 500 because the index is heavily weighted to innovative technology companies such as those above, and because of its exposure to the Magnificent Seven. It also looks like a better investment than ETFs that bill themselves as AI ETFs.
For example, Global X Robotics & Artificial Intelligence counts Nvidia as its biggest holding but also has lesser-known AI stocks like ABB, Keyence, and Fanuc among its top five holdings.
Which ETF is right for you?
If you're looking to get exposure to the Nasdaq-100, there are a number of different ETFs that you can invest in. The biggest is the Invesco QQQ ETF (QQQ 1.54%), which manages nearly $200 billion in assets, and another appealing option is the Invesco Nasdaq-100 ETF (QQQM 1.55%), which offers a lower expense ratio than the QQQ and reinvests dividends.
Both those ETFs can give you exposure to the top AI stocks on the market right now, and the best part about it is that it will reallocate those percentages frequently as some stocks perform better than others.
Additionally, smaller AI stocks are likely to trade on the Nasdaq since that exchange is favored by tech companies, meaning that investors get some exposure to up-and-coming stocks, once they are among the Nasdaq's 100 biggest companies.
Buying a Nasdaq-100 ETF can give you exposure to AI stocks, diversification, and an investment that has a long track record of outperforming the S&P 500. Best of all, it's much easier to than putting together your own basket of AI stocks.
