The stock market has hosted a number of incredible success stories throughout history, but it's also littered with spectacular failures, which is why risk management is so important for investors.
Discipline is especially important when new, trendy investment opportunities like artificial intelligence (AI) sweep the market and drive enormous gains in individual stocks. This year alone, shares of semiconductor giant and AI pioneer Nvidia (NVDA 6.18%) soared a whopping 220%. But the stock also suffered a peak-to-trough decline of 18% between August and October alone, which is a lot of volatility for the average investor to stomach.
While Nvidia is a fantastic company with the financial results to back up the gains in its stock, it's not the only player in the AI industry. The same way many internet companies didn't survive the dot-com era in the early 2000s, not every AI company will achieve lasting success.
Nonetheless, this technology will create enormous value in the coming years, and here's the good news: Investors don't have to pick winners and losers if they follow one simple strategy instead.
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ETFs can be a safer way to invest in AI over the long term
Exchange-traded funds (ETFs) can give investors exposure to an entire sector of the stock market with the purchase of just one single security. See, an ETF can hold dozens or even hundreds of different stocks within a given industry, which saves investors from having to build a portfolio themselves.
That means an ETF is effectively immune to the failure of any one company, because it's diversified and no single stock makes up a dominant share of its portfolio. That's a very attractive feature for a new industry like AI, where there will almost definitely be companies that won't survive.
Many AI-focused ETFs are available to investors today, and I'll share two of them below.
1. Global X Robotics and Artificial Intelligence ETF
The Global X Robotics and Artificial Intelligence ETF (BOTZ 2.52%) invests in companies that hope to benefit from robotics and AI over the long term, including those developing industrial automation and even self-driving vehicles. It's very geographically diverse, with stocks from the U.S., Japan, Hong Kong, South Korea, Israel, and even Finland featured in its portfolio.
It's one of the more concentrated funds because it only holds 44 stocks. It's also heavily weighted toward its top five holdings, which represent 45.5% of the total value of its portfolio. This means it could be a little more volatile than other ETFs in this sector.
Nevertheless, this Global X ETF holds several of the AI stocks investors want to own. Its largest holding is Nvidia, which accounts for 14% of the portfolio, but other popular names in the fund include:
- UiPath, which develops robotics and automation software. It's one of Cathie Wood's favorite AI stocks and it's currently the second-largest holding at her firm, Ark Investment Management.
- C3.ai, which is a pioneer of the enterprise AI industry. It offers over 40 ready-made applications to businesses to help them harness the power of AI.
- Upstart Holdings, which has developed a unique AI algorithm to determine the creditworthiness of potential borrowers more accurately than traditional methods.
This particular Global X ETF delivered a return of 28% so far in 2023, so it's comfortably outperforming the S&P 500 index, which has only gained 20%. But the fund has an expense ratio of 0.69%, which is high relative to some of its peers charging closer to 0.4%, so investors are paying for that strong performance.
This fund is suited to investors with a higher risk tolerance because of its concentration. While it's likely to be a safer bet than owning a handful of individual AI stocks over the long term, it isn't as conservative as other AI ETFs.
2. iShares Robotics and Artificial Intelligence Multisector ETF
While similar in name, the iShares Robotics and Artificial Intelligence Multisector ETF (IRBO 1.98%) has a very different composition than the Global X BOTZ ETF. It owns 112 different stocks so it's far more diversified, which bodes well for investors with a lower appetite for risk.
This iShares ETF seeks to expose investors to companies at the forefront of robotics and AI innovation. It invests globally in companies across the entire robotics and AI value chain -- that includes chipmakers, software developers, and end users of AI.
The iShares IRBO ETF is also incredibly well-balanced because none of its holdings account for more than 1.75% of the value of its portfolio, which significantly reduces concentration risk. Its top 10 holdings only represent 15.2% of the portfolio.
Interestingly, none of the most popular AI names are in its top 10. Stocks like Nvidia, Microsoft, Amazon, Advanced Micro Devices, and Google parent Alphabet all feature in the iShares IRBO ETF, but none of them account for more than 1% of the portfolio.
The iShares IRBO ETF also holds other interesting AI plays:
- Meta Platforms, which is using AI to feed more relevant content to users of Facebook and Instagram.
- Apple, which uses AI across many of its digital applications and is also developing AI chips for its mobile devices.
- Salesforce, which recently launched a powerful AI chatbot called Einstein GPT to empower enterprises to better serve their customers.
The iShares IRBO ETF delivered a return of 28% so far in 2023, placing it on par with the Global X BOTZ ETF. However, it's arguably a more attractive fund because of its diversification and because its expense ratio is only 0.47%.
As I touched on earlier, the iShares IRBO ETF is the ideal choice for investors seeking long-term exposure to AI while keeping the risks under control.
