Artificial intelligence (AI) could represent one of the greatest financial opportunities in a generation, but that doesn't mean making money from it will be easy. Past technological revolutions highlight the difficulty that investors will face with picking winners and losers in the AI race.
Pets.com was a poster child of the internet boom in the late 1990s, but the company ultimately failed during the dotcom bust in the early 2000s because it was never able to turn a profit. Amazon, on the other hand, became one of the world's largest e-commerce companies, but the majority of its profit now comes from cloud computing -- a segment of its business which didn't even exist until 2006.
Simply put, nobody can really predict how the AI boom is going to shake out, and that's why buying an exchange-traded fund (ETF) might be the best choice for the average investor, instead of picking a portfolio of individual AI stocks.
The Roundhill Generative AI and Technology ETF (CHAT +2.71%) holds almost every AI stock an investor could want, so here's why it's a great option.
Image source: Getty Images.
Every top AI stock in one ETF
The Roundhill ETF invests in companies building the platforms, infrastructure, and software powering the AI revolution. It's an actively managed fund, so the professionals at Roundhill Investments will adjust the portfolio when they identify new opportunities in the industry.
The ETF holds just 49 stocks, but its top three positions account for 18.8% of the total value of its portfolio -- and they happen to be three of the leading AI companies in the world:
|
Stock |
Roundhill ETF Portfolio Weighting |
|---|---|
|
1. Nvidia (NVDA +1.73%) |
8.40% |
|
5.24% | |
|
3. Microsoft (MSFT 1.33%) |
5.24% |
Data source: Roundhill. Portfolio weightings are accurate as of Oct. 24, 2024, and are subject to change.
Nvidia designs graphics processing chips (GPUs) for data centers; its chips are the most powerful in the world when it comes to AI development. The company generated a record $26.3 billion in data center revenue in its most recent quarter, which was a 154% increase from the year-ago period, thanks primarily to GPU sales.
Nvidia is preparing to ship its new GB200 GPU systems -- based on its Blackwell architecture -- to customers at the end of this year. They will deliver an increase in performance of up to 30 times compared to the company's old H100 systems. Nvidia CEO Jensen Huang says demand for Blackwell chips is "insane," and they are likely to drive a new phase of growth for the company.
Alphabet and Microsoft are among Nvidia's biggest customers. They fill their data centers with AI GPUs and rent the computing capacity to developers through their cloud platforms. Both companies have also built their own AI assistants; Alphabet has Gemini, and Microsoft is home to Copilot (which was developed using some of OpenAI's models).
Outside of its top three positions, the Roundhill ETF also holds AI stocks like Meta Platforms, Advanced Micro Devices, Broadcom, Oracle, Apple, and Amazon.
NYSEMKT: CHAT
Key Data Points
The Roundhill ETF is beating the S&P 500 this year
The Roundhill ETF was established in May 2023, so it doesn't have much of a track record. However, it has delivered a return of 27.1% this year, which is higher than the 22.5% return in the S&P 500 index (^GSPC +0.84%) so far.
The ETF has an expense ratio of 0.75%, which is the proportion of the fund deducted each year to cover costs. It's more expensive than ETFs offered by Vanguard, for example, which typically charge 0.1% per year (or less). High expense ratios can negatively impact returns over time, so it's something to keep in mind when investing -- but it's typically acceptable to pay a premium for an ETF that consistently outperforms the broader market.
AI is forecast to add incredible value to the global economy. A recent report by the International Data Corporation suggests AI will contribute $19.9 trillion to economic output worldwide by 2030, and if that prediction is right, the Roundhill ETF should do very well in the coming years.
However, if AI fails to live up to the hype, stocks like Nvidia could lose a significant amount of their value, which will drive a period of underperformance for the ETF. Therefore, it's best to own this ETF as part of a balanced portfolio of other stocks and funds that are less exposed to the tech sector.
