Picking top artificial intelligence (AI) stocks has been top of mind for growth investors. And while debates about Nvidia versus Advanced Micro Devices, or Intel over Qualcomm, or Amazon compared to Microsoft are certainly worth having, there's a far simpler way to invest in AI: exchange-traded funds (ETFs).
The Technology Select Sector SPDR ETF (XLK 0.43%), Invesco QQQ ETF (QQQ 0.41%), and the iShares Semiconductor ETF (SOXX 0.76%) are all worthy foundational holdings for unlocking baseline exposure to AI stocks. Here's a breakdown of each ETF to help you determine which is best for you.
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The perfect ETF for letting winners run
With $65.4 billion in net assets, the Technology Select Sector SPDR is one of the most common, simplest, and least expensive ways to invest in the tech sector.
As of April 4, 40.1% of the fund was in software companies; 26.7% was in semiconductor and semiconductor equipment companies; 21.2% in technology hardware, storage, and peripherals; 5.4% in IT services; 3.8% was allocated in communication equipment companies, and 2.9% in electronic equipment instruments and components companies.
However, a lot of the ETF is concentrated in just a few companies. Microsoft and Apple make up 42.8% of the entire fund, with Nvidia, Broadcom, and AMD dominating the semiconductor allocation with 11.9% of the fund's total weighting.
The Technology Select Sector SPDR Fund is a bet that today's top tech companies will also be the future leaders in AI. This has so far been a winning strategy because the tech leaders have the deep pockets, personnel, and innovation pipelines to make mistakes and capitalize on opportunities.
The fund is exposed to smaller, disruptive players taking market share from the current front-runners. It is also vulnerable to an overall valuation correction in the tech sector. The fund's 39.1 price-to-earnings (P/E) ratio is a considerable premium to the S&P 500's 28.3 P/E. However, the tech sector has a track record of growing into a lofty multiple.
With just a 0.09% expense ratio, the Technology Select Sector SPDR Fund stands out as a good choice for investors looking for widespread exposure to AI from leading tech companies rather than picking a single winner.
Expanding beyond tech
The Invesco QQQ ETF is massive, with $259.3 billion in net assets. It mirrors the performance of the Nasdaq 100, which consists of the 100 largest companies by market cap in the Nasdaq Composite.
There is some crossover with the Technology Select Sector SPDR Fund. But the key difference is that the Invesco QQQ isn't limited to the tech sector; it is also less top-heavy in just a few holdings.
For example, Microsoft and Apple are the highest-weighted stocks in this ETF -- just like the Technology Select Sector SPDR Fund. But their combined weighing is just 16.3% in the Invesco QQQ.
The Invesco QQQ has less exposure to the tech sector and less emphasis on the semiconductor industry, but it does have far more diversification. The Technology Select Sector SPDR Fund excludes companies like Amazon, Alphabet, Meta Platforms, Tesla, and others because they are in non-tech sectors like consumer discretionary and communications.
A downside of the Invesco QQQ is that it includes a lot of companies that have little to do with AI. The ninth-largest holding in the fund is Costco Wholesale. PepsiCo isn't far behind as the 12th largest.
This ETF isn't targeting a special theme; it is simply looking at the largest companies in the Nasdaq Composite no matter the industry. It's a good starting point if you are looking for diversification and a growth focus, but it might not be well suited for investors who are specifically targeting an AI financial product.
Investing in AI through the semiconductor industry
The iShares Semiconductor ETF is a good fit for investors who want to target AI investment specifically through the lens of chip stocks. The demand for computational power is on the rise due to the needs of complex AI models.
Nvidia is supplying processing power through its data center business. AMD is competing with Nvidia in the GPU market and is making CPUs for AI-enabled PCs.
Taiwan Semiconductor helps manufacture chips for top players like Nvidia, AMD, Broadcom, and Intel.
Broadcom makes networking chips that allow AI components to work together.
The advantage of the iShares Semiconductor ETF is that it is a direct way to invest in this need for more computing power from various markets. The ETF is surprisingly diversified. For example, Nvidia is the largest holding at 8.6%, but the top 10 holdings in the ETF make up 57.4%. With 30 total holdings, that means the bottom 20 make up 42.6% of the fund -- which is much more balanced compared to the other ETFs in this article.
The iShares ETF has a 0.35% expense ratio, so it's higher than 0.2% from the Invesco QQQ and 0.09% from the Technology Select Sector SPDR Fund. But if most of your AI interests are in the chip space, this ETF is one of the best options out there.
Using AI ETFs to your advantage
Each of these ETFs offers unique ways to invest in AI, but it's important to use ETFs in a way that fits your portfolio's allocation.
For example, if you are satisfied with your existing positions in Microsoft and Apple, then you probably wouldn't want to invest in the Technology Select Sector SPDR Fund since over 40 cents of every dollar invested goes into those two stocks.
Understanding the composition of an ETF can help you avoid accidentally overexposing your portfolio to a particular theme or company.
Perhaps the simplest reason to choose an ETF over an individual stock is because you aren't as familiar with the industry or don't have high conviction in one name over another. In that case, ETFs do an excellent job of giving you skin in the game through a passive approach.
