Artificial intelligence (AI) could represent one of the biggest financial opportunities in a generation, but that doesn’t mean it will be easy to make money from it. Past technological revolutions highlight the difficulty investors will face in picking winners and losers in the AI race.
Pets.com was a poster child of the late 1990s Internet boom, but the company ultimately went bankrupt during the dot-com bust of the early 2000s because it could never turn a profit. Amazonon the other hand, became one of the world’s largest e-commerce companies, but most of its profits now come from cloud computing – a business segment that didn’t even exist until 2006.
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Simply put, no one can really predict how the AI boom will develop, which is why buying an exchange-traded fund (ETF) may be the best choice for the average investor, rather than picking a portfolio of individual AI stocks .
The Roundhill Generative AI and Technology ETF(NYSEMKT: CHAT) owns almost all the AI stocks an investor could want, so here’s why it’s a great option.
Image source: Getty Images.
The Roundhill ETF invests in companies building the platforms, infrastructure and software powering the AI revolution. It is an actively managed fund, so Roundhill Investments professionals will adjust the portfolio as they identify new opportunities in the sector.
The ETF only owns 49 stocks, but the top three holdings account for 18.8% of the portfolio’s total value – and they happen to be three of the leading AI companies in the world:
Stock
Roundhill ETF Portfolio Weighting
1. Nvidia(NASDAQ: NVDA)
8.40%
2. Alphabet(NASDAQ: GOOG)(NASDAQ: GOOGL)
5.24%
3. Microsoft(NASDAQ: MSFT)
5.24%
Data source: Roundhill. Portfolio weights are accurate as of October 24, 2024 and are subject to change.
Nvidia designs graphics processing chips (GPUs) for data centers; the chips are the most powerful in the world when it comes to AI development. The company generated a record $26.3 billion in data center revenue in its most recent quarter, up 154% from the same period last year, driven primarily by GPU sales.
Nvidia is preparing to deliver its new GB200 GPU systems – based on the Blackwell architecture – to customers at the end of this year. They will deliver a performance increase of up to 30 times compared to the company’s old H100 systems. Nvidia CEO Jensen Huang says demand for Blackwell chips is “insane” and will likely fuel a new phase of growth for the company.
Alphabet and Microsoft are among Nvidia’s largest customers. They fill their data centers with AI GPUs and rent the computing capacity to developers via their cloud platforms. Both companies have also built their own AI assistants; Alphabet has Gemini and Microsoft is home to Copilot (which was developed using some models from OpenAI).
Outside of the top three holdings, the Roundhill ETF also owns AI stocks such as Metaplatforms, Advanced micro devices, Broadcom, Oracle, Appleand Amazon.
The Roundhill ETF was founded in May 2023, so it doesn’t really have a track record. However, this year it has returned 27.1%, which is higher than the 22.5% return in the S&P500 index (SNPINDEX: ^GSPC) until now.
The ETF has an expense ratio of 0.75%, which is the portion of the fund that is deducted annually to cover expenses. For example, it is more expensive than ETFs offered by Vanguard, which typically charge 0.1% per year (or less). High expense ratios can have a negative impact on returns over time, so it’s something to keep in mind when investing – but it’s usually acceptable to pay a premium for an ETF that consistently outperforms the broader market.
AI is predicted to add incredible value to the global economy. A recent report from the International Data Corporation shows that AI will contribute $19.9 trillion to global economic output by 2030, and if that prediction is correct, the Roundhill ETF should do very well in the coming years.
However, if AI fails to live up to the hype, stocks like Nvidia could lose a significant portion of their value, causing a period of underperformance for the ETF. Therefore, it is best to own this ETF as part of a balanced portfolio of other stocks and funds that are less exposed to the technology sector.
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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. Suzanne Frey, a director at Alphabet, 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 any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Oracle. The Motley Fool recommends Broadcom 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.
Meet the Artificial Intelligence (AI) ETF with 18.8% of its portfolio invested in Nvidia, Alphabet and Microsoft, originally published by The Motley Fool
