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The internet boom culminated in a spectacular bust during the early 2000s, and it taught investors that it’s difficult to pick winners and losers during a technological revolution. Many companies fail to survive once the dust settles, and only some manage to thrive.
It’s also difficult to predict what the economic landscape will look like in the years ahead. When Amazon started using the internet to sell books, it had no idea most of its profits would eventually come from its cloud computing business — because it didn’t even exist at the time.
The current artificial intelligence (AI) revolution will probably be no different. Semiconductor giants like Nvidia are creating an incredible amount of value from AI right now. And yet some analysts predict the software side of the industry could soon be even bigger.
Rather than trying to pick AI winners and losers, investors might want to consider buying an AI-focused exchange-traded fund (ETF) instead. An ETF can hold dozens of different stocks, so one or two failures typically won’t result in catastrophic losses for the entire fund. Here’s why the iShares Future AI and Tech ETF (NYSEMKT: ARTY) might be a great option.
Image source: Getty Images.
A diversified AI fund
This iShares ETF was established in 2018 with a focus on robotics and multisector AI, but it changed its name and restructured its holdings in August to better reflect its more focused goal of investing in companies at the forefront of the AI revolution. That includes companies developing generative AI, AI infrastructure, AI software, AI data solutions, and more.
The ETF has holdings in 46 stocks, but it’s heavily concentrated toward its top 10 positions, which account for 40.8% of the total value of its portfolio:
|
Rank/Stock |
Portfolio Weighting |
Rank/Stock |
Portfolio Weighting |
|---|---|---|---|
|
1. Advanced Micro Devices |
5.89% |
6. Meta Platforms |
3.18% |
|
2. Broadcom |
5.86% |
7. CrowdStrike |
3.08% |
|
3. Nvidia |
5.58% |
8. Arista Networks |
3.02% |
|
4. Super Micro Computer |
5.06% |
9. Alphabet Class A |
2.98% |
|
5. Intel |
3.32% |
10. Palantir |
2.88% |
Data source: iShares. Portfolio weightings are accurate as of Sept. 27, 2024, and are subject to change.
Semiconductor stocks occupy the top five spots in the iShares ETF because that’s where most of the value is being created right now. Nvidia supplies the industry’s most powerful data center graphics processing units (GPUs) for AI development, and it’s struggling to keep up with demand. Advanced Micro Devices is an emerging competitor to Nvidia, but the company has also taken a leadership position in the market for AI chips in the personal computing segment.
Broadcom, on the other hand, is a multifaceted AI company. It makes custom AI accelerators (chips) for large tech giants and data center networking hardware, like Ethernet switches. Plus, Broadcom’s subsidiaries are deploying AI across cybersecurity, the cloud, and more.
But the iShares ETF also holds a diverse group of AI stocks beyond the hardware segment. Meta Platforms, for example, created Llama, the most popular open-source large language model (LLM), which it’s using to develop new AI features for Facebook and Instagram. Then there is CrowdStrike, a leading provider of AI-powered cybersecurity software.
Outside its top 10 positions, the iShares ETF holds key AI stocks like MicrosoftAmazon, Taiwan Semiconductor Manufacturingand more.
Since this is a specialized fund, it’s more expensive to hold than an ETF that simply tracks an index like the S&P 500. It has an expense ratio of 0.47%, which is the proportion of the fund deducted each year to cover management costs. For perspective, the Vanguard S&P 500 ETF has an expense ratio of just 0.03%. There is no ongoing fee to hold individual stocks, so investors should consider this cost before buying an ETF.
Potential for solid long-term returns
The iShares ETF can be prone to volatility because it’s so concentrated, meaning a small number of stocks can have a significant influence over its performance. With that said, investors don’t have much historical data to study because the ETF is only two months old in its current form.
Looking forward, AI infrastructure spending should continue to grow for at least the next year, which means stocks like Advanced Micro Devices, Broadcom, and Nvidia are likely to do well for the foreseeable future. After crashing 51% this year so far, Intel might also find its footing soon because it’s rumored to be a takeover target, which could help the company recover some value.
AI software stocks, like Meta Platforms, CrowdStrike, and Alphabet, could also be a source of upside for the ETF over the next year. Meta and Alphabet trade at very attractive valuations, and 2025 could be a powerful bounce-back year for CrowdStrike.
In summary, investors seeking exposure to the AI industry should consider buying this ETF as an alternative to picking a group of individual AI stocks. However, it’s important to do so as part of a balanced portfolio to protect against potential volatility.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Arista Networks, CrowdStrike, Meta Platforms, Microsoft, Nvidia, Palantir Technologies, Taiwan Semiconductor Manufacturing, and Vanguard S&P 500 ETF. The Motley Fool recommends Broadcom and Intel and recommends the following options: long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.