Artificial intelligence (AI) could be one of the greatest financial opportunities for investors in a generation. Over the last two years alone, companies that supply data center hardware components like chips and networking equipment have created trillions of dollars in value, led by Nvidia.
But other segments of the AI industry like software, cloud services, and platform technologies could be poised to generate even more value than the hardware space in the years to come. Cathie Wood from Ark Investment Management believes AI software companies (for example) could eventually generate $8 in revenue for every $1 they spend on data center chips.
However, previous technological revolutions (especially the rise of the internet) have taught investors that picking winners and losers can be extremely difficult. That’s why buying an exchange-traded fund (ETF) with a high concentration of AI stocks might 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 anywhere from a few dozen to a few thousand different stocks to give investors exposure to a specific segment of the market (like AI). Each fund is managed by a team of professionals who rebalance the portfolio as necessary, which allows investors to take a passive approach.
Since most ETFs have a large number of holdings, the failure of one or two companies typically won’t result in catastrophic losses for the whole fund. That’s a great attribute when investing in a new tech industry like AI because uncertainty is high.
Several AI-focused ETFs have come online in the last few years, but here’s why the Global X Artificial Intelligence and Technology ETF (NASDAQ: AIQ) might be a great choice for investors.
The Global X ETF holds several top AI stocks
The Global X ETF invests in companies that will benefit from integrating AI into their products and services, in addition to companies supplying the infrastructure and hardware that makes it possible.
The ETF holds 84 different stocks, but it’s relatively concentrated toward its top 10 positions, which account for 34.1% of the total value of its 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. Meta Platforms |
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 X. Portfolio weightings are accurate as of Oct. 11, 2024, and are subject to change.
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 businesses develop the technology. The company is based in China, so it can expose investors to the global adoption of AI.
Oracle, on the other hand, has built some of the most powerful and cost-efficient AI data centers in the industry. They are in high demand from top start-ups like OpenAI, Cohere, and Elon Musk’s xAI, and the company is working to expand its footprint more than tenfold, from 162 data centers to 2,000.
Meta, Salesforce, and Netflix are focused 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 is using to build new AI features for Facebook and Instagram. Netflix uses AI in a more subtle way — the technology powers its recommendation engine, ensuring subscribers see the content that is most relevant to them.
Outside of its top 10 positions, the Global X ETF holds a number of other leading AI stocks including Nvidia, Amazon, Apple, Microsoft, Tesla, Micron Technology, and more.
The Global X ETF regularly outperforms the S&P 500
Because it’s a relatively specialized fund, the Global X ETF has a high expense ratio of 0.68%, which is the portion of its assets deducted each year to cover management costs. It’s not the most expensive AI ETF out there, but that expense ratio is much higher than a typical Vanguard index fund, for example, which can cost under 0.1% per year to hold.
However, investors have been handsomely rewarded despite the high fee. The Global X ETF has delivered a compound annual return of 15.7% since it was established in 2018, which is much better than the 13.1% average annual return in the S&P 500 (SNPINDEX: ^GSPC) index.
The 2.6 percentage-point differential might not sound like much, but it makes a big difference over time thanks to the effects of compounding:
|
Starting 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 far more diversified because it represents 11 different sectors, whereas the Global X ETF will only do well if the tech sector is firing on all cylinders. Going forward, that means 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 great sign. Plus, Nvidia CEO Jensen Huang thinks data center operators will spend a whopping $1 trillion on AI infrastructure and chips over the next five years, which suggests that tech giants are expecting a significant amount 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, just in case the technology fails to live up to the hype.
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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. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has 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 on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
