Artificial intelligence (AI) stocks have been booming over the last few years, and if the industry continues to find its footing over time, they could have further to climb.
With so many AI stocks to choose from, though, it can be tough to decide where to buy. For many investors, an AI-focused exchange-traded fund (ETF) can be a smart way to buy into this industry. An ETF is a collection of stocks bundled together into a single investment, making it easier to own multiple companies at once.
The iShares Future AI and Tech ETF (ARTY +0.27%) has been thriving this year, nearly doubling in price since April alone. But is now really the right time to invest? Here's what you need to know.
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Should you invest in AI stocks right now?
The iShares Future AI and Tech ETF contains 48 stocks from companies with ties to the AI industry. These companies are expected to contribute to the development of this technology through AI data and infrastructure, software, services, and generative AI, for example.
Investing in an AI ETF can sometimes be less risky than buying individual stocks, to an extent. Although all of the holdings within this fund focus on AI technology, there is added diversification by investing in dozens of stocks at once. If a few of them stumble, it's less likely to sink your entire portfolio.
Launched in 2018, this ETF has a relatively short track record with some significant ups and downs in that time. This year has been particularly lucrative for the fund, however, as it's earned total returns of more than 70% since April alone. In other words, if you'd invested in this ETF back in April, you'd have almost doubled your money in just eight months.
While these types of returns are promising, keep in mind that AI is one of the most volatile industries out there. This ETF has experienced substantial downturns over the past several years, with a decline of nearly 56% between February 2021 and October 2022.
These significant price swings are fairly normal with highly volatile stocks from up-and-coming industries, so be prepared for a rollercoaster of ups and downs if you choose to invest.
Tech ETFs can offer greater stability
If you're looking specifically to gain exposure to AI companies without having to buy individual stocks, an AI fund like the iShares Future AI and Tech ETF can be a good option. You'll need to prepare for almost certain volatility, but investing in an AI ETF can be a smart way to buy into this sector of the market with less effort than researching specific stocks.
On the other hand, if you're simply looking for a fund that can offer tech exposure without as much risk, a growth ETF or a tech-specific ETF could help you earn above-average returns with fewer price swings.
Invesco QQQ (QQQ 0.59%), for example, is a growth fund containing just over 100 stocks with the potential for above-average returns. While this ETF is heavily weighted toward technology, it does include stocks from other industries, as well -- which increases diversification and can help reduce risk.
The Vanguard Information Technology ETF (VGT 0.86%) is another option for those looking specifically for tech industry exposure. This fund contains over 300 tech holdings, with nearly one-third of the fund allocated to semiconductor stocks -- a sector that plays a pivotal role in powering AI technology. In other words, this ETF can provide exposure to AI with the added diversification of stocks from other corners of the tech sector, too.
Not only have these two ETFs experienced less short-term volatility than the iShares AI ETF, but they've also outperformed it since its founding in 2018.
Keep in mind that any growth ETF (and especially tech ETFs) can still experience major price swings. If the market takes a turn for the worse in the coming months or years, all of these funds could be hit hard. However, if you're seeking a slightly less risky way to invest in AI technology, a fund with added diversification can offer greater stability.
Investing in an AI-specific ETF can be a smart way to gain exposure to the AI market without having to buy individual stocks, but carefully consider how much risk you're willing to take. These investments can be lucrative, but they can also experience nauseating downturns in the short term.
