There are plenty of ways to invest in artificial intelligence (AI).
Nvidia (NVDA 0.43%) and Broadcom (AVGO 1.18%) are designing cutting-edge AI chips.
Amazon, Microsoft, Alphabet, and Oracle (ORCL 3.00%) are pushing the bounds of cloud computing.
Taiwan Semiconductor and Intel manufacture chips using equipment supplied by companies like ASML, Applied Materials, and Lam Research.
There's also the indirect method of investing in AI, which can be achieved through any company that utilizes it to enhance efficiency. For example, Walmart's AI-powered supply chain optimization.
Exchange-traded funds (ETFs) with an AI bent offer a simple way to invest in a portfolio of companies rather than picking and choosing just a handful of names. Here's why the Vanguard Information Technology ETF (VGT 0.78%), iShares Semiconductor ETF (SOXX 1.93%), and the Vanguard S&P 500 Growth ETF (VOOG 0.41%) are AI ETFs that have what it takes to outperform the S&P 500 (^GSPC 0.34%) over the next five years.
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1. Vanguard Information Technology ETF
This ETF mirrors the performance of the tech sector. Big gains from "Ten Titans" stocks like Nvidia, Microsoft, Apple, Broadcom, and Oracle have made the ETF heavily concentrated in just a handful of names.
Just 10 holdings make up 57.8% of the fund. However, many of those holdings have a ton of exposure to AI.
Not long ago, the tech sector was dominated by software names. However, big gains from companies like Nvidia and Broadcom, which are powering data centers with AI chips, have given the tech sector much more exposure to semiconductor, materials, and hardware. These industries, along with electronic equipment and components, now make up well more than half of the tech sector.
The Vanguard Information Technology ETF is one of the least expensive ways to invest in the tech sector, with an expense ratio of just 0.09%.
2. iShares Semiconductor ETF
If you like the technology sector's increasing reliance on semiconductor stocks, then you'll love this ETF. It's the ideal pick for folks who believe the semiconductor industry is one of the best ways to invest in AI.
The strategy has paid off, as the iShares Semiconductor ETF has achieved a staggering 184% total return over the last five years, which is better than the 151% total return for the Vanguard Information Technology ETF and far better than the 151% total return for the S&P 500.
This fund has a higher expense ratio than the aforementioned Vanguard ETFs, at 0.34%. However, it's a great way to get exposure to semiconductor companies that have very low weightings in the S&P 500 (or aren't included at all).
Advanced Micro Devices has a 7.1% weighting in the fund, Qualcomm makes up 5.8%, and Texas Instruments, Micron Technology, Intel, Lam Research, Marvell Technology, Applied Materials, KLA, ASML, and Taiwan Semiconductor are all more than 4%.
3. Vanguard S&P 500 Growth ETF
This fund isn't limited to a single sector. Rather, it essentially filters the S&P 500 by doubling down on top growth stocks and leaving out value-focused companies.
This strategy has helped the fund slightly outperform the S&P 500 over the last five years. But it could easily beat the market over the next five years if mega-cap growth stocks continue leading the major indexes to new heights.
Around 55% of this ETF is invested in the Ten Titans, which have plenty of upside potential from AI. What's more, the ETF has a very low expense ratio of just 0.07%, or $7 for every $10,000 invested.
Add it all up, and it's a simple and low-cost way to get exposure to growth-focused S&P 500 companies.
Winning ETFs with room to run
The discussed ETFs are ideally suited for investors looking to build their AI exposure around today's leading companies. However, they may not be suitable for investors seeking to diversify into newer companies.
A common mistake is duplicating holdings across ETFs, which results in more exposure than an investor may realize. For example, if an investor owns Nvidia stock outright but also has $10,000 in an S&P 500 index fund, that's another $720 in Nvidia simply because it makes up 7.2% of the index.
However, it could also be a mistake to ignore today's leaders just because they are hiding in plain sight. Big tech firms are ramping up spending on AI, and a lot of that spending is funneling to the semiconductor industry and associated hardware and infrastructure companies. That gives Nvidia and Broadcom the green light to pour excess profits into research and development to expand their lead over the competition.
In this vein, doubling down on top tech stocks through low-cost ETFs may be one of the simplest ways to potentially beat the S&P 500 over the next five years.
