Artificial intelligence (AI) took the world by storm since early last year. Software applications like ChatGPT are capable of instantly generating text, images, videos, and computer code through the power of AI, and they are driving a productivity boom for businesses.
In fact, some Wall Street forecasts suggest AI will add anywhere between $7 trillion and $200 trillion to the global economy in the coming decade. Nvidia, which designs the industry's most powerful data center chips for processing AI workloads, has already added over $1.8 trillion to its market capitalization since the start of 2023 alone.
But picking the long-term winners and losers won't be easy. Past technology revolutions (like the internet in the early 2000s) have taught us that for every Nvidia in the AI race, there will be several companies that fail. Here's the good news: Investors don't need a crystal ball to make money if they use one simple strategy.
Image source: Getty Images.
Exchange-traded funds are a great way to invest in AI
Exchange-traded funds (ETFs) can hold dozens or even hundreds of individual stocks to either track the performance of a specific market index, or to give investors exposure to a specific sector. They are usually actively managed by a team of professionals who adjust the portfolio in line with the fund's objective, which allows investors to take a passive approach.
There are several ETFs focused specifically on AI, and by holding so many individual stocks, they insulate investors from catastrophic financial losses if one or two of those companies fail. That's a great feature when it comes to investing in emerging, fast-paced technologies.
With that in mind, here's why the Global X Artificial Intelligence and Technology ETF (AIQ +2.00%) and the iShares Robotics and Artificial Intelligence Multisector ETF (IRBO +3.09%) are two excellent choices.
NASDAQ: AIQ
Key Data Points
1. Global X Artificial Intelligence and Technology ETF (AIQ)
The AIQ ETF invests in companies that stand to benefit from integrating AI in their products and services, and also those producing the hardware required for AI development. It currently holds 84 stocks, which include some of the most popular AI names investors want to own.
The ETF is heavily weighted toward its top 10 holdings, which account for 34.9% of the total value of its portfolio. That creates some concentration risk, meaning AIQ's performance can be heavily influenced by just a few of these stocks:
|
Stock |
AIQ ETF Portfolio Weighting |
|---|---|
|
1. Nvidia |
4.38% |
|
2. Tencent |
4.08% |
|
3. Qualcomm |
3.50% |
|
4. Netflix |
3.44% |
|
5. Meta Platforms |
3.42% |
|
3.29% | |
|
7. Amazon |
3.27% |
|
8. Alibaba |
3.26% |
|
9. Broadcom |
3.21% |
|
10. Oracle |
3.04% |
Data source: Global X. Portfolio weightings are accurate as of May 16, 2024, and are subject to change.
Concentration risk aside, investors seeking to invest in AI won't be disappointed that Nvidia is the AIQ ETF's top holding. As I touched on earlier, AI development wouldn't be possible without its industry-leading GPUs for the data center.
Netflix and Meta Platforms are examples of companies integrating AI into their existing services. Netflix uses the technology to power its recommendation engine, which feeds users content they might like to watch. Meta does the same thing on its social media platforms like Facebook and Instagram, but the company has also developed its own large language model (LLM) called Llama, which it's using to create products like the new Meta AI chatbot.
Outside of its top 10, AIQ also holds other popular AI stocks like Microsoft, Tesla, and Micron Technology.
The AIQ ETF delivered a return of 37% over the past year, thanks to strong performances from stocks like Nvidia, Meta, and Netflix. That crushes the 27.4% return in the S&P 500 index, and it also beats the 36.5% return in the tech-heavy Nasdaq-100.
Its longer-term return is equally impressive, having gained 17.7% compounded annually over the last five years. That compares to just 15.5% annually for the S&P 500.
If AI lives up to some of Wall Street's forecasts I mentioned earlier, the AIQ ETF will likely continue to outperform the broader market, so it's a great way to play this technological revolution.
NYSEMKT: IRBO
Key Data Points
2. iShares Robotics and Artificial Intelligence Multisector ETF (IRBO)
Investors who are looking for a more conservative way to play the AI boom might want to consider the IRBO ETF. It invests in companies across the value chain of AI and robotics, including those developing hardware, software, and platforms that can benefit from those technologies. It invests in companies both in the U.S. and overseas.
IRBO holds 109 different stocks, and it's far less concentrated than the AIQ ETF, which helps to smooth out any volatility the AI industry might experience. IRBO's top 10 holdings account for just 15.3% of the total value of its portfolio, but it still includes some of the must-have AI stocks:
|
Stock |
IRBO ETF Portfolio Weighting |
|---|---|
|
1. MicroStrategy |
2.38% |
|
2. Nvidia |
1.76% |
|
3. Arm Holdings |
1.56% |
|
4. Matterport |
1.46% |
|
5. Spotify |
1.44% |
|
6. Kawasaki Heavy Industries |
1.40% |
|
7. Megaport |
1.37% |
|
8. PB Fintech |
1.35% |
|
9. Qualcomm |
1.30% |
|
10. Meta Platforms |
1.27% |
Data source: iShares. Portfolio weightings are accurate as of May 16, 2024, and are subject to change.
Nvidia takes second spot in this ETF. At the top is MicroStrategy, which many investors might know as a proxy for Bitcoin because the company holds around $14.4 billion worth of the cryptocurrency. However, MicroStrategy also has a portfolio of cloud-based software products designed to help businesses integrate AI into their workflows.
Arm Holdings is another important position for IRBO. The company helps some of the world's largest semiconductor companies design their chips, including Nvidia, Advanced Micro Devices, and Apple.
IRBO also invests outside the U.S. Kawasaki, for example, is a Japanese industrial giant with a large presence in robotics and automation. Then there is Megaport, an Australian software company that helps businesses connect their cloud networks globally.
The IRBO ETF delivered a return of just 10% over the past 12 months, so it's underperforming AIQ and the S&P 500. That's partly because it owns stocks like Peloton Interactive, which is down 43% over the past year, and Bumble, which lost 28% of its value over the same period.
The drawback of an ETF with lower concentration risk is that it can't maximize returns from top-performing stocks like Nvidia, especially when other holdings are going the opposite way. However, it also means the ETF will minimize its downside if highfliers like Nvidia happen to reverse course. That's why the IRBO ETF might be a good choice for investors with a more conservative risk profile.
