Investing to attain potential multi-million-dollar returns takes time, good ideas, and a bit of luck. One of the easiest ways to miss out on outsized gains is to lack the conviction needed to hold stocks through periods of volatility.
All of today's top companies have undergone multiple brutal drawdowns. It's easy to forget that just a few years ago, in 2022, Nvidia (NVDA 2.54%), Meta Platforms (META -1.15%), Amazon (AMZN -1.09%), Alphabet (GOOGL -0.38%) (GOOG -0.32%), and Tesla (TSLA 0.34%) all saw their stock prices fall over 40% from all-time highs. Since the start of 2023, Nvidia stock is trading up more than 1,100%, Meta is up over 500%, and Tesla, Amazon, and Alphabet have all crushed the comparable performance of the S&P 500 (^GSPC 0.41%).
Exchange-traded funds (ETFs) can make it easier to hold volatile growth stocks through steep downturns because of their diversification. Here's what makes the Invesco S&P 500 Top 50 ETF (XLG 0.47%), the iShares A.I. Innovation and Tech Active ETF (BAI 0.26%), and the Global X Artificial Intelligence & Technology ETF (AIQ 0.12%) top AI ETFs to buy now.
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1. Invesco S&P 500 Top 50 ETF
The Invesco S&P 500 Top 50 ETF invests in the top 10% of S&P 500 companies by market cap. Many of the most valuable U.S. companies are growth and AI-focused names. The ETF has a staggering 62% invested in the "Ten Titans" -- Nvidia, Microsoft, Apple, Alphabet, Amazon, Meta Platforms, Broadcom (AVGO 0.58%) Tesla, Oracle, and Netflix.
The Ten Titans make up 39% of the S&P 500, which is already a lot. But this ETF takes that concentration a step further.
The fund is a particularly good buy for investors who believe that the largest companies by market cap will benefit the most from AI.
The fund's expense ratio of 0.2% is higher than some passively managed ETFs, but it's still reasonable for investors looking for a simple way to bet on today's existing winners.
2. iShares A.I. Innovation and Tech Active ETF
With a net expense ratio of 0.55%, this fund is considerably more expensive than the 0.03% expense ratio found in the Vanguard S&P 500 ETF.
Unlike most passively managed funds, this active ETF isn't market-cap weighted. So its weights are based more on conviction than the value of the company.
Oracle's 5% weighting is nearly as high as Microsoft's 5.7%. Oracle could become the largest cloud purpose-built for AI within the next five years. And Broadcom is at 8.4%, right behind Nvidia at 9.2%.
The fund is very new, having launched less than a year ago in October 2024. So investors should only approach the ETF after doing more research on its holdings and the strategy employed by its active managers.
3. Global X Artificial Intelligence & Technology ETF
This ETF is ideally suited for investors looking to build an AI portfolio around U.S. companies while also gaining significant exposure to international leaders. Around 31% of the Global X Artificial Intelligence & Technology ETF is invested in non-U.S. companies. Alibaba Group, Samsung Electronics, Tencent, and Taiwan Semiconductor are all top-10 holdings in the fund. And you won't find any of these companies in the S&P 500 because they are non-U.S. firms.
Another unique characteristic of this fund is that it isn't top-heavy. No holding makes up more than 4%, which is a stark contrast to the iShares A.I. Innovation and Tech Active ETF, which has over a third of the fund invested in just five stocks.
In this vein, the Global X Artificial Intelligence & Technology ETF is a good fit for investors looking for a diversified and global approach to the AI theme. The ETF features an "unconstrained approach," which targets established and up-and-coming innovative companies without regard to stock market sector or geography. Its 0.68% expense ratio isn't cheap, but it could be worth it for investors looking for high growth potential.
Bold bets for risk-tolerant investors
These ETFs are likely to outperform the S&P 500 over the next five years if investor appetite for tech-focused companies and AI names remains positive. But eventually, companies will need to convert capital expenditures (capex) into returns. We are still in the early innings of the AI build-out, with droves of data centers coming online in the next few years. But demand for those data centers depends on the usage of AI models by end users.
Agentic AI presents an opportunity to further integrate AI into regular business functions by helping with task completion and organization. And edge AI involves running algorithms directly on devices rather than depending on the cloud.
Despite the long-term potential of AI, there are plenty of reasons why the discussed ETFs could disappoint. A cyclical downturn for factors unforeseen could challenge the lofty valuations of companies that are priced for perfection. Or simply a pullback in capex spending after an initial ramp-up.
In this vein, investors need to consider the risks associated with allocating to AI names through individual holdings and ETFs. Investors should only approach AI-focused ETFs if they have a high risk tolerance, a long-term investment time horizon, and if the strategy aligns with their existing holdings and investment objectives.
