Investors don’t have to pick winners and losers in the fast-evolving artificial intelligence industry if they buy exchange-traded funds instead.
Artificial intelligence (AI) could be one of the biggest financial opportunities for investors in a generation. In the past two years alone, companies that provide data center hardware components such as chips and networking equipment have created trillions of dollars in value, led by Nvidia.
But other segments of the AI industry, such as software, cloud services and platform technologies, could potentially generate even more value than the hardware sector in the coming years. Cathie Wood of Ark Investment Management, for example, believes AI software companies could ultimately generate $8 in revenue for every dollar they spend on data center chips.
However, previous technological revolutions (particularly the rise of the Internet) have taught investors that picking winners and losers can be extremely difficult. Therefore, buying an exchange-traded fund (ETF) with a high concentration of AI stocks may be a safer bet than building a portfolio of individual companies.
Image source: Getty Images.
ETFs are a diversified way to invest in a stock market theme
An ETF can hold a few dozen to a few thousand different stocks to give investors exposure to a specific market segment (such as AI). Each fund is managed by a team of professionals who rebalance the portfolio as necessary, allowing investors to take a passive approach.
Because most ETFs have a large number of investments, the failure of one or two companies typically won’t result in catastrophic losses for the entire fund. That’s a great feature when investing in a new technology industry like AI, because uncertainty is high.
Several AI-focused ETFs have come online in recent years, but here’s why: Global X Artificial Intelligence and Technology ETF (AIQ 0.32%) could be a good choice for investors.
The Global X ETF owns several top AI stocks
The Global
The ETF holds 84 different stocks, but is relatively concentrated in the top 10 holdings, which represent 34.1% of the total value of the entire portfolio:
|
Stock |
Global X ETF portfolio weighting |
|---|---|
|
1. Alibaba Group |
4.07% |
|
2. IBM |
3.57% |
|
3. Oracle |
3.46% |
|
4. ServiceNow |
3.45% |
|
5. Metaplatforms |
3.40% |
|
6. Tencent Holdings |
3.39% |
|
7. Cisco systems |
3.29% |
|
8. Salesforce |
3.17% |
|
9. Netflix |
3.17% |
|
10. Broadcom |
3.12% |
Data source: Global
All of the above companies are developing or using AI in some capacity. Alibaba offers a portfolio of cloud-based AI services, complete with data center infrastructure designed to help companies develop the technology. The company is based in China so it can expose investors to global AI adoption.
Oracle, on the other hand, has built some of the most powerful and cost-efficient AI data centers in the industry. These data centers are in high demand from top startups like OpenAI, Cohere and Elon Musk’s xAI, and the company is working to grow its footprint more than tenfold, from 162 data centers to 2,000.
Meta, Salesforce and Netflix focus on the software side of the AI industry. Meta developed Llama, the world’s most popular open-source large language model (LLM), which the company uses to build new AI features for Facebook and Instagram. Netflix uses AI in a more subtle way: the technology powers its recommendation engine, helping subscribers see the content most relevant to them.
Outside of its top 10 holdings, the Global Amazon, Apple, Microsoft, Tesla, Micron technologyand more.
The Global X ETF regularly outperforms the S&P 500
Because it is a relatively specialized fund, the Global It’s not the most expensive AI ETF out there, but its expense ratio is much higher than, say, a typical Vanguard index fund, which can cost less than 0.1% per year to hold.
However, despite the high fee, investors have been richly rewarded. The Global S&P500 (^GSPC 0.47%) index.
The 2.6 percentage point difference may not sound like much, but it makes a big difference over time thanks to the effects of compounding:
|
Opening balance (2018) |
Compound annual return |
Balance in 2024 |
|---|---|---|
|
$50,000 |
15.7% (Global X ETF) |
$119,941 |
|
$50,000 |
13.1% (S&P 500) |
$104,651 |
Calculations by author.
The S&P 500 is much more diversified as it represents eleven different sectors, while the Global X ETF will only do well if the technology sector is firing on all cylinders. Going forward, this means that the success of this ETF will be highly dependent on the continued adoption of AI.
According to McKinsey & Company, 72% of organizations worldwide are already using AI in at least one business function, which is a good sign. Additionally, Nvidia CEO Jensen Huang thinks data center operators will spend as much as $1 trillion on AI infrastructure and chips over the next five years, indicating that tech giants expect significant levels of AI adoption among consumers and businesses in the future.
The Global X ETF offers investors a complete AI portfolio. However, they should only buy it as part of a diversified portfolio of other stocks or ETFs, in case the technology doesn’t live up to the hype.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Amazon, Apple, Cisco Systems, Meta Platforms, Microsoft, Netflix, Nvidia, Oracle, Salesforce, ServiceNow, Tencent, and Tesla. The Motley Fool recommends Alibaba Group, Broadcom and International Business Machines and recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
