During the past few months, a new pocket of the artificial intelligence (AI) realm has come into the spotlight. Investors have been cheering on quantum computing stocks, and companies such as IonQ, Rigetti Computing, and Quantum Computing have drawn a good deal of attention.
Whenever an exciting new opportunity starts to become mainstream, it can be tempting to follow the crowd and buy into the narrative. However, this type of thinking is aligned with an investment philosophy known as the Greater Fool Theory -- in other words, you hope to sell to an unknowledgeable investor willing to overpay even more for your shares than you did.
The fact is that each of the companies above were penny stocks for most of last year, and only began to take off once the idea of quantum computing started to become more of a talking point among AI enthusiasts.
If you are considering an investment in quantum computing, I think you're better off choosing a diverse platform such as an exchange-traded fund (ETF). Below, I'm going to explore the Defiance Quantum ETF (QTUM +0.13%) and assess why this could be a better option than some of the speculative names mentioned above.
What makes the Defiance Quantum ETF unique?
ETFs can be a great option for investors who do not wish to manage their portfolio actively. Even if you're interested in a specific area but are unsure about what stocks to invest in, ETFs are still a viable option.
Some ETFs offer specific themes, and in the case of the Defiance Quantum ETF, the primary focus areas are AI and quantum computing.
According to the latest available data, the Defiance Quantum ETF holds top AI stocks including Palantir Technologies, Nvidia, and Taiwan Semiconductor Manufacturing, defense sector names including Northrop Grumman and Lockheed Martin, and companies exploring quantum mechanics including Alphabet and International Business Machines. In addition, the ETF does also hold positions in smaller, speculative stocks including Rigetti, IonQ, and D-wave Quantum.
Despite holding positions in some riskier small-cap names, I see an investment in the Defiance Quantum ETF as a solid choice for those interested in quantum computing stocks given its broad exposure to adjacent industries such as semiconductors, enterprise software, and defense. The diverse set of stocks in the ETF provides some degree of insulation from individual stocks that may experience outsize volatility from time to time.
Image source: Getty Images.
Is the Defiance Quantum ETF a good buy right now?
The chart below illustrates the price gain of the Defiance Quantum ETF during the past year.
For much of 2024, the ETF experienced fairly steady gains -- quite unsurprising given AI remained a major tailwind in the stock market last year.
However, during the past few months of the year the ETF experienced notable valuation expansion. This is also unsurprising considering many of the stocks mentioned in this article experienced significant run-ups toward the end of 2024.
Bearing that in mind, the Defiance Quantum ETF is trading just pennies below its 52-week high right now. While it appears there is a good bit of momentum fueling the ETF's price, I wouldn't necessarily shy away. That's because I think it's highly unlikely that the portfolio managers for the ETF will make any major changes to its core holdings.
Many of the stocks in the Defiance Quantum ETF are considered leaders in the AI industry, and quantum computing represents just another tangential opportunity. For these reasons, I'd be more inclined to invest in the Defiance Quantum ETF over any single quantum-focused stock.
I think a prudent approach to investing in the Defiance Quantum ETF is to use dollar-cost averaging over a long-term horizon. This method will allow you to gain increasing exposure to high-growth markets, all while maintaining a high degree of diversification and reducing exposure to any one particular business that could become vulnerable at the flip of a switch.
