The S&P 500 (^GSPC +0.36%) hit a record high earlier this year, certifying the bull market that began when the index bottomed out in October 2022. But it's currently in the midst of a modest sell-off, which started at the end of March, as investors navigate headwinds relating to inflation and interest rates.
History suggests the S&P 500 always climbs to new highs given enough time, and considering the index is just 1.3% below its recent record close as of this writing, it looks like a typical bull market pullback. That offers investors an opportunity to buy stocks at a discount, particularly those in red-hot sectors like artificial intelligence (AI) that have ripped higher over the past year.
Predicting which AI stocks will be the best performers over the long term is a challenge for even the most seasoned analysts on Wall Street, given the pace with which the industry is moving. Luckily for investors, there's a simple solution.
Image source: Getty Images.
Exchange-traded funds are a great option
Exchange-traded funds (ETFs) can hold dozens or even hundreds of individual stocks either from one specific sector of the market, or to replicate the performance of a specific market index. They are typically managed by a team of experts who adjust the portfolios as necessary, which makes them ideal for passive investors.
Since ETFs can hold so many stocks, the failure of one company won't lead to catastrophic financial losses, which is a great feature when investing in emerging technologies like AI.
Several ETFs exist today that can give investors exposure to the AI boom. Here's why the Roundhill Generative AI & Technology ETF (CHAT +5.15%) and the iShares Expanded Tech Sector ETF (IGM +1.02%) are two great choices.
NYSEMKT: CHAT
Key Data Points
1. Roundhill Generative AI & Technology ETF
Generative AI has the potential to drive a productivity explosion across the global economy thanks to applications like ChatGPT, which can create text, images, videos, and even computer code on demand. The Roundhill ETF invests in companies developing the infrastructure, platforms, and software to bring generative AI to life.
The ETF holds 52 different stocks, but it's heavily weighted toward its top 10 positions, which account for 51.4% of the total value of its portfolio:
|
Stock |
Roundhill Generative AI ETF Portfolio Weighting |
|---|---|
|
Nvidia |
11.17% |
|
Microsoft |
10.37% |
|
Alphabet |
5.41% |
|
Meta Platforms |
4.33% |
|
Adobe |
3.86% |
|
Amazon |
3.42% |
|
Salesforce |
3.39% |
|
ServiceNow |
3.29% |
|
Baidu |
3.20% |
|
Super Micro Computer |
3.01% |
Data source: Roundhill. Portfolio weightings as of May 7.
Nvidia is the poster child of the AI revolution. It makes the world's most powerful graphics processing chips (GPUs) that can handle mountains of data to help developers train AI models. The company is currently worth $2.3 trillion, with around $1.5 trillion of that value created in the past 12 months alone thanks to a 214% surge in its stock price.
Microsoft is the world's largest company based on market cap, and it's weaving AI through its entire product portfolio. It has developed its own models, but it agreed to invest $10 billion in ChatGPT creator OpenAI last year, so it's leveraging that start-up's technology, too. Alphabet is also developing its own AI models under the Gemini banner, which are transforming its flagship platforms like Google Search.
Adobe is using generative AI to enhance its creative software products like Photoshop. Similarly, Safesforce has developed an AI assistant called Einstein to help customers squeeze more value out of its customer-relationship management tools.
The Roundhill ETF was only established in mid-2023, so it doesn't have a very long track record. It has delivered a gain of 14.2% this year so far, so it's doing better than the S&P 500 index, which is up 9.4%.
Having such a high concentration of AI stocks in this ETF could lead to underperformance if the technology fails to live up to the hype. However, for those seeking some exposure to it, this ETF would be a great addition to a diversified portfolio.
NYSEMKT: IGM
Key Data Points
2. iShares Expanded Tech Sector ETF
This iShares ETF has a relatively broad objective: to invest in technology and technology-related companies that develop everything including (but not limited to) hardware, software, and internet marketing.
Therefore, the ETF's portfolio of 278 stocks doesn't include AI names alone. However, its top 10 holdings account for 55.9% of the total value of its portfolio, and the list features some of the most popular AI stocks:
|
Stock |
iShares Expanded Tech Sector ETF Weighting |
|---|---|
|
Apple |
9.29% |
|
Microsoft |
8.73% |
|
Nvidia |
8.59% |
|
Meta Platforms |
7.86% |
|
Alphabet Class A |
5.87% |
|
Alphabet Class C |
4.96% |
|
Broadcom |
4.26% |
|
Salesforce |
2.20% |
|
Netflix |
2.13% |
|
2.08% |
Data source: iShares. Weightings are accurate as of May 6.
Apple hasn't been as vocal about its AI initiatives as other tech giants, but it could become one of the most important companies in the industry. Its iPhone 15 Pro is fitted with an Apple-designed A17 Pro chip, which the company says is capable of processing AI workloads on the device.
It lays the groundwork for the integration of generative AI software, and in March, Alphabet and OpenAI were reportedly competing to have their chatbots installed by default on Apple's 2.2 billion active devices.
However, despite sitting at the top of the above table, Apple isn't the iShares ETF's largest holding. That title goes to Alphabet, with its Class A and Class C shares representing a combined 10.8% of the total value of its portfolio. As I touched on earlier, Alphabet's powerful Gemini models are bringing generative AI to Google Search, but they are also available to create content across popular products like Google Docs and Gmail.
Outside of its top 10, the ETF owns a number of other important AI stocks. They include Micron Technology, which makes memory and storage chips crucial for AI workloads, and CrowdStrike, which is a leader in AI-powered cybersecurity software.
The ETF was established in 2001, so it has a long track record to give investors some confidence. It has generated a compound annual return of 10.6% since inception; that number climbed to 19.9% over the last 10 years thanks to the proliferation of technologies like software, cloud computing, and AI. Assuming AI lives up to the hype, there's a good chance those returns continue for the foreseeable future.
