Investors watched Nvidia grow from a $360 billion company to a $2 trillion powerhouse since the beginning of 2023, almost entirely on the back of its data center chips, which are designed for processing artificial intelligence (AI) workloads.
Many other stocks also caught the AI wave recently, including Advanced Micro Devices, Microsoft, and Amazon. However, AI alone hasn't been enough to lift stocks like C3.ai, Lemonade, or Upstart from slumps of more than 80% from their all-time highs.
As in every technological revolution in the past, many AI companies won't survive, let alone rise to the heights Nvidia reached. The long-term winners and losers in the AI race aren't obvious right now, which means investors have to be comfortable with a high degree of risk when buying individual stocks.
However, they could take a different approach.
Image source: Getty Images.
Exchange-traded funds can deliver strong AI returns with limited risk
Exchange-traded funds (ETFs) are designed to hold dozens, or even hundreds, of individual stocks from a specific market sector, neatly packaged in a single security. Their portfolios are managed by experts who adjust the holdings as necessary, which means investors can take a passive approach.
By having a large number of holdings, ETFs won't suffer catastrophic losses if a single company fails, which is a great feature in an emerging industry like AI.
Several AI-focused ETFs have come to market in the last few years, but here's why the Global X Artificial Intelligence and Technology ETF (AIQ 1.11%) and the Global X Robotics and Artificial Intelligence ETF (BOTZ 1.34%) might be two of the best bets.
1. Global X Artificial Intelligence and Technology ETF (AIQ)
The AIQ ETF was established in 2018, and it has deployed $1.6 billion into 84 different stocks on behalf of investors. The objective of this ETF is to invest exclusively in companies that will benefit from the continued development of AI on both the hardware and software side, so it's a great option for investors of all experience levels.
NASDAQ: AIQ
Key Data Points
Despite its expansive list of holdings, AIQ is heavily weighted toward its top 10 positions, which account for 33.4% of the total value of its portfolio. That creates concentration risk, because those stocks will have an outsized influence on the overall performance of the ETF; however, they include some of the most popular AI names in the industry:
|
Stock |
AIQ Portfolio Weighting |
|---|---|
|
1. Nvidia |
3.86% |
|
2. Meta Platforms |
3.79% |
|
3. Netflix |
3.41% |
|
4. Tencent Holdings |
3.41% |
|
5. Amazon |
3.39% |
|
6. Alphabet |
3.18% |
|
7. IBM |
3.17% |
|
8. Oracle |
3.11% |
|
9. Qualcomm |
3.11% |
|
10. Microsoft |
3.04% |
Data source: Global X. Portfolio weightings are accurate as of April 19, 2024, and are subject to change.
Nvidia is an obvious top holding for an ETF focused on AI. Its H100 data center GPU has consistently been the best performer in the industry for processing AI workloads, and the company is now shipping its new H200, which is twice as powerful. Nvidia will raise the bar again in 2025 when it starts selling chips built on its new Blackwell architecture. In other words, this stock probably still has room to run.
Meta Platforms is the parent of social networks Facebook and Instagram, and it's using AI across both of them to feed more relevant content to users. Plus, Meta continues to develop its Llama large language models (LLMs), which already underpin exciting AI features like its new chatbot, Meta AI.
Netflix is the world's largest streaming service, and it uses AI in its content recommendation engine. Amazon, Alphabet, and Microsoft are home to dominant cloud computing platforms that offer an expanding portfolio of AI products and services to businesses. Oracle, on the other hand, has emerged as one of the go-to data center infrastructure providers for AI developers.
The AIQ ETF has delivered a 38.3% return over the past year, which crushes the 20.1% return of the S&P 500. The high concentration toward the AI stocks mentioned above is a huge reason for the ETF's outperformance, but it also has a solid long-term track record. AIQ has delivered a compound annual gain of 15.3% since its inception in 2018, which comfortably beats the 10.7% annual return in the S&P 500 over the same period.
If AI lives up to the hype over the coming years, investors might be glad they bought the AIQ ETF today. It has an expense ratio of 0.68%, or $68 annually for each $10,000 invested.
2. Global X Robotics and Artificial Intelligence ETF (BOTZ)
The BOTZ ETF was established in 2016, and it manages $2.5 billion on behalf of investors. However, it's far more concentrated than the AIQ ETF, because it only holds 43 stocks. Its objective is also slightly different, because it focuses on niche segments of the AI space including robotics, automation, and autonomous vehicles.
NASDAQ: BOTZ
Key Data Points
Plus, the top 10 holdings in the BOTZ ETF represent 62.1% of the total value of its portfolio, making it highly sensitive to the performance of just a few stocks:
|
Stock |
BOTZ Portfolio Weighting |
|---|---|
|
1. ABB Ltd |
9.25% |
|
2. Nvidia |
8.39% |
|
3. Intuitive Surgical |
8.29% |
|
4. Keyence Corp |
7.54% |
|
5. SMC Corp |
7.17% |
|
6. Yaskawa Electric Corp |
4.64% |
|
7. Fanuc Corp |
4.63% |
|
8. Dynatrace |
4.49% |
|
9. Daifuku Co |
3.89% |
|
10. UiPath |
3.87% |
Data source: Global X. Portfolio weightings are accurate as of April 19, 2024, and are subject to change.
Nvidia is the second-largest holding in this ETF, but it has a much higher representation as a percentage of its portfolio compared to AIQ. ABB Ltd, which is a Swedish-Swiss industrial giant with an expansive presence in electrification, automation, and robotics, has top billing in BOTZ. It even has a portfolio of data center solutions designed to make its offerings more energy efficient, cost effective, and automated.
ABB is just one of many foreign holdings in the BOTZ ETF. Keyence manufactures industrial automation equipment, and Yaskawa Electric makes industrial robots -- both companies are based in Japan.
Back in the U.S., Intuitive Surgical is a hybrid healthcare and technology company that designs robotic products to improve the clinical outcomes of patients in surgery, and Dynatrace is a software platform that uses AI to help businesses optimize the performance of its digital applications and infrastructure.
The BOTZ ETF delivered a gain of 25% over the past year, so it underperformed the AIQ ETF, but it's still doing better than the S&P 500. Its compound annual return since its inception in 2016 also stands at 11.1%, but that could improve going forward thanks to the AI tailwind. It also has the same expense ratio as AIQ, at 0.68%.
This ETF carries more risk than most of its peers because of its high concentration. However, that could also be the reason for its potential market-beating performance in the future as the AI revolution unfolds.
