This simple strategy saves investors from having to pick winners and losers in the artificial intelligence (AI) race.
Investors have been pouring money into stocks of companies like Nvidia, Alphabet and Microsoft to gain exposure to the burgeoning artificial intelligence (AI) industry. All three have traded well this year but have fallen sharply from all-time highs over the past month.
Nvidia shares are down 20% from an intraday high of $140.75. Alphabet shares are down 13% from an intraday high of $191.73. Microsoft shares are down 9% from an intraday high of $468.23.
Investors needn’t panic. After all, Nvidia is poised to gain a staggering 134% through 2024 alone. But past tech booms driven by the internet, cloud computing, and enterprise software have taught us that trends like AI can be breeding grounds for volatility. Because we don’t yet know the full extent of AI’s use cases, it’s hard to predict which companies will be long-term winners and losers.
But investors don’t need a crystal ball to profit from the AI revolution.
Image source: Getty Images.
Exchange-traded funds (ETFs) can be a great alternative to individual stocks
Exchange-traded funds (ETFs) can hold dozens or even hundreds of individual stocks representing a particular segment of the market, neatly bundled together in one security. Many ETFs are actively managed, with a team of experts adjusting the portfolio as needed, allowing investors to feel comfortable taking a passive approach.
Failure is inevitable in an emerging industry like AI, but an ETF with a large number of stocks could protect you from catastrophic losses if some companies don’t survive.
Several AI ETFs have hit the market over the past few years, but here’s why the Global X Artificial Intelligence and Technology ETF (AIQ -0.32% ) is a great choice.
The ETF holds a variety of stocks in the AI industry.
The Global X ETF will invest in companies that sell hardware components that fuel AI development, as well as companies that stand to benefit from integrating AI into existing products and services.
The ETF holds 84 stocks, but is heavily weighted to the top 10 stocks, which account for 35.3% of the portfolio’s total value. These top 10 stocks include many of the most popular AI stocks that investors have been clamoring to buy over the past year.
stock
Global X ETF Portfolio Weightings
1. NVIDIA
5.2%
2. Tencent Holdings
3.6%
3. Netflix
3.5%
4. Oracle
3.4%
5. Broadcom
3.4%
6. Meta Platform
3.3%
7. Qualcomm
3.24%
8. Amazon
3.2%
9. Alphabet
3.1%
10. Apple
3.10%
Data source: Global X. Portfolio weightings are accurate as of July 26, 2024 and are subject to change.
Nvidia makes the most powerful data center chips for AI development. Demand is surging, with the company’s revenue growing by triple digits in each of the past four quarters. Nvidia recently released a new series of chips based on the Blackwell architecture, further increasing the company’s dominance in the industry.
Oracle runs one of the world’s best AI datacenter infrastructures, most of which run on Nvidia chips. Amazon also runs Nvidia-powered AI datacenters, but has designed its own chips to give developers an alternative. The company also continues to integrate AI into its e-commerce, streaming and advertising businesses.
Netflix and Meta Platforms are great examples of companies using AI to enhance their existing products. AI powers the recommendation engine for Netflix’s streaming platform, showing users the most relevant content. Similarly, AI curates content feeds for Meta’s Facebook and Instagram social networks. But Meta is also building the world’s largest open source large-scale language model (LLM), called Llama, which will pave the way for exciting new AI applications.
Outside of the top 10, the Global X ETF holds a number of popular AI stocks, including Microsoft, Tesla, Micron Technology, and Datadog.
Outperforming the S&P 500 over the long term
The Global X ETF is up 13.4% so far this year, lagging the S&P 500 index, which is up 15%. But the ETF had outperformed the index this year before dropping 3.1% in July due to a selloff in AI stocks such as Nvidia. The S&P 500 was flat in July as investors shifted money to stocks outside the technology sector, protecting the index from declines.
But the long term is a different story. The Global X ETF was launched in 2018 and has since delivered a compounded annualized return of 15.6% (net of fees), dwarfing the S&P 500’s average annualized gain of 13.1% over the same period. Because of the effect of compounding, that 2.5% difference translates into big dollar amounts.
Beginning balance (2018)
Compound annual return
Balance in 2024
$10,000
15.6% (Global X ETF)
$23,864
$10,000
13.1% (S&P 500)
$20,930
Authors’ calculations.
AI could be one of the most valuable tech booms in history: NVIDIA CEO Jensen Huang believes data center operators will spend $1 trillion over the next five years upgrading and expanding infrastructure to meet the demands of AI developers, while consulting firm PwC predicts that the entire AI industry will contribute $15.7 trillion to the global economy by 2030.
If these predictions are correct, the Global X ETF should outperform the S&P 500 for the foreseeable future. However, as we saw in July, investor sentiment can change quickly and cause periods of underperformance. Thus, if AI fails to live up to expectations, a decline in stocks such as Nvidia could weigh on the ETF’s return potential, which is an important risk investors must consider.
It’s probably best to buy the Global X ETF as part of a diversified portfolio and hold it for the long term.
Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and public relations at Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anthony DiPizio has no investment in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet, Amazon, Apple, Datadog, Meta Platforms, Microsoft, Netflix, Nvidia, Oracle, Qualcomm, Tencent, and Tesla. The Motley Fool recommends Broadcom and recommends long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
