We're in the era of artificial intelligence. The growth of AI is affecting nearly every sector of the stock market, but perhaps nothing is as exciting as the opportunities in generative AI, which is very different from the traditional AI products businesses have used for years.
Traditional AI remains very useful for a variety of tasks, such as recognizing patterns. That makes it great for assigning credit scores, filtering spam, and detecting fraud, for instance. Generative AI is much different because it actually creates content rather than just sifting through it. The first widespread generative AI application, ChatGPT, came out in November 2022, and the reception was breathtaking -- ChatGPT enrolled more than 30 million users in just two months, making it one of the fastest-growing launches in history.
Businesses today are still trying to figure out the best ways to use generative AI, but it is undoubtedly a huge opportunity for investors. MarketsandMarkets.com, a market research and consulting firm, estimates that the generative AI market is in a "hypergrowth" phase that is expected to jump from $71.4 billion in 2025 to $890.6 billion by 2032 -- a compound annual growth rate of 43.4%.
Picking and choosing the best stocks to profit from generative AI can be tricky, but an ideal way to invest is to look for a basket of stocks through exchange-traded funds. If you want to beat the projected growth of the generative AI market, here are three thematic ETFs that provide diversified exposure to the sector and can help you get richer.
Image source: Getty Images.
VanEck Semiconductor ETF
The VanEck Semiconductor ETF (SMH 2.62%) tracks the MVIS US Listed Semiconductor 25 index, which follows companies involved in semiconductor production and equipment. As you might expect, the fund holds 25 semiconductor companies, with the top holdings being Nvidia, Taiwan Semiconductor, Broadcom, Micron Technology, and ASML, which together comprise nearly half of the fund's weighting.
However, this is a great fund for quick exposure to the companies that are at the forefront of generative AI. Nvidia and Broadcom are two of the biggest chipmakers; Taiwan Semiconductor provides foundry services to all three, ASML builds the leading lithography machines that fabricate semiconductor components, and Micron is a leader in creating computer memory and data storage devices.
NASDAQ: SMH
Key Data Points
This ETF has an expense ratio of 0.35%, or $35 annually per $10,000 invested, and is up 59% during the past year.
State Street SPDR S&P Semiconductor ETF
If you want a broader array of semiconductor stocks, the State Street SPDR S&P Semiconductor ETF (XSD 3.26%) provides access to 43 companies. It's also an equal-weight ETF, so it aims to give you the same exposure to both small- and large-cap stocks by mirroring the performance of the S&P Semiconductor Select Industry index.
At this writing, top holdings are Micron Technology, Macom Technology Solutions, Power Integrations, Intel, and Allegro Microsystems, all accounting for between 3.5% and 3% of the fund.
NYSEMKT: XSD
Key Data Points
The potential upside of this fund is that you won't be affected if a big name like AMD or Nvidia takes a tumble. But you also won't profit from their outsize gains.
The State Street SPDR S&P Semiconductor ETF also has an expense ratio of 0.35% and is up 41% during the past 12 months. It is certainly in the mix to provide returns of 43% or more.
iShares Semiconductor ETF
The iShares Semiconductor ETF (SOXX 3.15%) focuses specifically on U.S. companies that design, manufacture, or distribute semiconductors. The fund, which is managed by BlackRock, is market-cap weighted, unlike the State Street ETF, and currently holds 31 companies.
NASDAQ: SOXX
Key Data Points
The top holdings in this fund are a reasonable mix of the two prior ETFs -- Nvidia, Micron, Advanced Micro Devices, Applied Materials, and Broadcom are at the top, collectively making up 34.5% of the fund. The expense ratio of this ETF is also a touch lower than the VanEck and State Street funds, at 0.34%.
In all, the iShares Semiconductor ETF is a good choice for investors who are looking for a broad sector fund while minimizing foreign exposure. The fund is up 56% during the past year, making it a solid bet to outpace generative AI's growth.
