Bringing new technologies to market is never a smooth process. There was an entire stock market collapse in the early 2000s when the internet bubble burst, which proved that even the most revolutionary technologies must be supported by a viable business model in the long run.
Artificial intelligence (AI) is the new craze among stock market investors at the moment. This frenzy isn't quite as irrational as the dot-com period two decades ago, because companies like Nvidia (NVDA -0.48%) genuinely have billions of dollars in sales and profit from AI. In other words, AI is already big business.
However, while Nvidia shares have surged 215% in the past year alone, AI stocks like C3.ai, Lemonade, and Upstart are each down more than 80% from their all-time highs.
It means picking winners and losers in the AI race won't be any easier than it was with other hot technologies in the past. But if the industry does well as a whole, investors don't need a crystal ball to make money while minimizing their risk.
Image source: Getty Images.
Exchange-traded funds are a great way to play the AI revolution
Exchange-traded funds (ETFs) are designed to give investors exposure to a specific segment of the broader market by holding dozens, or even hundreds of individual stocks. They are usually actively managed by a team of professionals, which means investors might get more peace of mind by owning one or two ETFs instead of building a portfolio of individual stocks themselves.
A number of AI-focused ETFs have launched over the last few years, and they each have different characteristics. The iShares Robotics and Artificial Intelligence Multisector ETF (IRBO 0.14%) and the Global X Autonomous & Electric Vehicles ETF (DRIV 1.50%) might be two great picks for investors looking to dive into the world of AI.
The iShares ETF holds 109 different stocks and the Global X fund holds 75, so the failure of one individual AI company won't derail their portfolios or lead to catastrophic financial losses for investors.
1. iShares Robotics and Artificial Intelligence Multisector ETF
The iShares ETF was established in 2018, and it manages around $659 million in assets for investors. It has a mandate to invest in companies at the forefront of the AI and robotics industries across the value chain.
The iShares ETF tries to maintain an equal-weight allocation, which means no single stock will have a disproportionate effect on the ETF's returns over time. Its top 10 holdings include some of the most popular AI stocks, and they account for 15.1% of the total value of its portfolio:
| Rank/Stock | ETF Weighting | Rank/Stock | ETF Weighting |
|---|---|---|---|
| 1. MicroStrategy | 2.44% | 6. PB Fintech | 1.32% |
| 2. Arm Holdings | 1.74% | 7. Informatica | 1.28% |
| 3. Nvidia | 1.68% | 8. Megaport | 1.25% |
| 4. Spotify | 1.54% | 9. Advanced Micro Devices | 1.25% |
| 5. Meta Platforms | 1.45% | 10. Netflix | 1.22% |
Data source: iShares. Portfolio weightings are accurate as of April 5, 2024, and are subject to change.
MicroStrategy might seem like a peculiar pick for the iShares ETF's top holding because it mostly makes headlines for its large Bitcoin purchases. However, the company also has a portfolio of cloud software tools to help businesses integrate AI into their data workflows.
Arm Holdings in the second spot makes more sense because it designs semiconductors on behalf of AI hardware leaders like Nvidia and AMD. Investors might not associate Spotify or Meta Platforms with AI, but they are in the ETF's top five holdings because they both use the technology in their core businesses.
Spotify developed an AI recommendation engine to feed relevant music suggestions to its users, and Meta uses AI to curate content on its Facebook and Instagram social media platforms. Meta has also developed one of the most advanced open-source large language models (LLMs), which developers can use to create their own AI applications.
A number of other popular tech stocks sit outside of the ETF's top 10 holdings, including Amazon, Microsoft, Apple, and Alphabet.
The iShares fund has generated a 7.6% compound annual return since its inception. That trails the S&P 500 index, which has delivered a 10.7% return over the same period. Not every company that uses AI will be a winner, and the ETF owns some laggards like Snowflake, Pinterest, and Snap.
Nevertheless, the iShares fund has the potential to deliver steady returns in the long run while -- most importantly -- limiting risk. It's a great addition to any investment portfolio in need of AI exposure.
2. Global X Autonomous & Electric Vehicles ETF
The Global X ETF was established in 2018, and it takes a different approach than its peers in a couple of ways.
- It focuses on companies developing autonomous technologies specifically (in addition to electric vehicles), which is a key subsegment of the AI industry.
- It isn't constructed with an equal-weight allocation, so despite owning 75 different stocks, its top 10 holdings account for 28.9% of the total value of its portfolio:
| Rank/Stock | ETF Weighting | Rank/Stock | ETF Weighting |
|---|---|---|---|
| 1. Nvidia | 4.69% | 6. Apple | 2.66% |
| 2. Toyota | 3.46% | 7. Intel | 2.39% |
| 3. Microsoft | 3.19% | 8. Honeywell | 2.22% |
| 4. Alphabet | 3.11% | 9. Tesla | 2.19% |
| 5. Qualcomm | 3.06% | 10. Hitachi | 1.96% |
Data source: Global X. Portfolio weightings are accurate as of April 5, 2024, and are subject to change.
Nvidia is the ETF's top holding, but not necessarily for its industry-leading AI data center chips. Nvidia also has an automotive segment that is home to its Drive platform. It offers car manufacturers all of the hardware and software they need to install self-driving capabilities into their new vehicles.
Similarly, Alphabet owns Waymo, a leading autonomous vehicle company. Consumers can already book a Waymo self-driving car in Phoenix, Arizona, through Uber's ride-hailing platform. Then there is electric vehicle giant Tesla, which has developed arguably the most advanced autonomous driving software in the world. Customers have already driven more than 500 million miles in the real world using beta versions.
A couple of Japanese companies are also in the Global X ETF's top 10. Toyota is one of the world's largest car manufacturers, and it's focusing heavily on electric and hybrid vehicles. Hitachi, on the other hand, makes components for such vehicles, and it also develops AI systems to power autonomy in everything from cars to mining equipment.
Outside of the top 10, the fund also owns stakes in car companies like Ford Motor Company and General Motors. Plus, it holds stocks in the supply chain, including lithium miners Pilbara Minerals and Piedmont Lithium.
The Global X ETF has delivered a compound annual return of 10.2% since its inception, outperforming its iShares peer but lagging the S&P 500 (albeit marginally). There is a clear global trend toward electrification and autonomy, which bodes well for the ETF's long-term potential, but these technologies do face regulatory hurdles. If autonomous driving never goes mainstream, for example, that would hurt many of the companies in the fund, which is a risk investors should consider.
