Roughly 70% of top executives believe artificial intelligence (AI) will transform the way their organizations create value over the next three years, according to a survey by consulting firm PwC published earlier this year. In PwC's report, it projects AI technology will add a whopping $15.7 trillion to the global economy by 2030.
Events like the dot-com boom and bust in the late 1990s and early 2000s suggest that picking winners and losers in new industries like AI won't be easy. Not every AI company will survive, let alone thrive. That's why buying an AI-focused exchange-traded fund (ETF) can be a great option for investors. It can offer exposure to a broad variety of AI stocks neatly packaged into one security, and it is far less susceptible to catastrophic losses if one or two fail.
The iShares Expanded Tech Sector ETF (IGM +0.27%) owns 281 different stocks, but it holds a high concentration of the most popular AI names.
Image source: Getty Images.
The iShares ETF recently completed a stock split
The iShares ETF delivered a compound annual return of 20.2% over the last 10 years, crushing the 13.2% average annual gain in the S&P 500 index over the same period.
The powerful returns propelled the ETF to a price per share of more than $510 in March, which made it somewhat inaccessible to smaller investors. As a result, iShares executed a 6-for-1 stock split, which increased the number of shares in circulation sixfold and organically reduced the price per share by a proportional amount. Now, investors can buy the ETF for roughly $92.
The ETF has large holdings in leading AI stocks like Meta Platforms, Apple, Microsoft, and Nvidia, which are likely to continue driving its gains. Here's how those stocks can help this ETF turn a $200,000 investment into $1 million over the long term -- but don't worry, investors with any starting balance can earn a fivefold return if this scenario plays out.
NYSEMKT: IGM
Key Data Points
Every popular technology stock, packed into one ETF
As I mentioned at the top, the iShares ETF holds 281 different stocks. It was established in 2001 so it has helped investors navigate several technology cycles from the internet to cloud computing to enterprise software.
AI is the dominant theme in the tech sector right now. The top four holdings in the iShares ETF account for 34.3% of the total value of its entire portfolio, and each of them has a dominant presence in AI:
|
Stock |
iShares ETF Portfolio Weighting |
|---|---|
|
1. Meta Platforms |
9.01% |
|
2. Apple |
8.99% |
|
3. Microsoft |
8.36% |
|
4. Nvidia |
7.94% |
Data source: iShares. Portfolio weightings are accurate as of Sept. 12, 2024, and are subject to change.
Meta Platforms might be a social media giant, but it has also built the most popular open-source large language model (LLM), called Llama. It's at the foundation of new AI features on Facebook and Instagram like Meta AI, a chatbot that can answer complex questions and generate images. Llama will enable the company to roll out AI agents for businesses in the future, which will be capable of handling incoming messages from customers, and potentially even processing sales.
Apple recently developed Apple Intelligence in partnership with OpenAI, which will launch on the iOS 18 operating system later this year. It will give iPhone, iPad, and Mac users new writing tools that can rapidly summarize and generate text content for messages and emails. Plus, the Siri voice assistant will be upgraded with the knowledge of ChatGPT, making it more capable than ever before. With 2.2 billion active devices worldwide, Apple could become the largest distributor of AI to consumers.
Microsoft is a multifaceted AI company. It developed a virtual assistant called Copilot, which is embedded in many of its flagship software products like Windows, 365 (Word, PowerPoint, and Excel), Edge, and Bing. Microsoft is also a leading provider of AI services through its Azure cloud platform. Businesses can access ready-made LLMs on Azure to help them deploy AI into their operations, and they can also tap into Microsoft's data centers to develop their own AI applications.
Finally, none of the above would be possible without Nvidia's graphics processors (GPUs) for the data center. The company can't keep up with demand for its chips, which is driving a surge in its revenue and earnings. That trend looks set to continue for at least the next year as Nvidia begins shipping a new generation of GPUs based on its Blackwell architecture, which will enable developers to create the most advanced AI apps to date.
Outside of those top four holdings, the iShares ETF has positions in a number of other important AI stocks like Alphabet (GOOG 0.51%)(GOOGL 0.81%), Oracle, and Advanced Micro Devices. But it also owns small stakes in leading technology stocks like Netflix, Salesforce, and Palo Alto Networks, which are using AI even though it isn't their core product.
Turning $200,000 into $1 million
The iShares ETF has generated a compound annual return of 10.9% since its inception in 2001. As I touched on earlier, it delivered an accelerated annual return of 20.2% over the last 10 years, because that's the period in which technologies like the smartphone, cloud computing, enterprise software, and AI experienced widespread adoption.
The below table shows how long it could take the ETF to turn an investment of $200,000 into $1 million based on a range of returns:
|
Starting Balance |
Compound Annual Return |
Time to Reach $1 Million |
|---|---|---|
|
$200,000 |
10.9% |
16 years |
|
$200,000 |
15.5% (midpoint) |
12 years |
|
$200,000 |
20.2% |
9 years |
Calculations by author.
It will be extremely difficult for the ETF to sustain a return of more than 20% over the long term. Its top four holdings have a combined market capitalization of $10.8 trillion, and each one is likely to experience decelerating revenue growth over time because of its sheer size. Meta, for example, already has 3.2 billion daily active users, so the company will inevitably hit a growth ceiling unless the world's population expands significantly. Apple and Microsoft are in similar positions, serving at least 1 billion customers each already.
However, even if the ETF reverts back to its average annual gain of 10.9%, it can still deliver a fivefold return for investors over 16 years. The ETF could unlock greater returns if new tech companies emerge and create significant value, or if the AI industry becomes larger than firms like PwC expect (which is a real possibility).
But the reverse is also true. If AI fails to live up to the hype, stocks like Meta, Nvidia, Apple, and Microsoft could suffer declines that will drive a period of poor performance for the iShares ETF. That's a good argument for owning the ETF as part of a balanced portfolio.
