To get exposure to the fast-growing artificial intelligence (AI) industry, investors bet heavily on stocks like Nvidia, Alphabet, and Microsoft. All three are trading in the green this year, but they have suffered steep pullbacks from their all-time highs over the past month:
Nvidia stock is down 20% from its all-time intraday high of $140.75.
Alphabet stock is down 13% from its all-time intraday high of $191.73.
Microsoft stock is down 9% from its all-time intraday high of $468.23.
Investors shouldn't panic -- after all, Nvidia is still sitting on a whopping 134% gain in 2024 alone. But past technology booms driven by the internet, cloud computing, and enterprise software have taught us that trends like AI can be a breeding ground for volatility. It's difficult to predict which companies will be the long-term winners and losers, because the full range of use cases for AI is not yet known.
But investors don't need a crystal ball to profit from the AI revolution.
Exchange-traded funds (ETFs) can be a great substitute for individual stocks
An exchange-traded fund (ETF) can hold dozens, or even hundreds of individual stocks representing a specific segment of the market, neatly packaged into one security. Many ETFs are actively managed, which means a team of professionals will adjust the portfolio as necessary so investors can sit back and take a passive approach.
Failure is inevitable in an emerging industry like AI, but an ETF that holds a large number of stocks will be insulated from catastrophic losses if some companies don't survive.
Several AI ETFs have come to market over the last few years, but here's why the Global X Artificial Intelligence and Technology ETF (NASDAQ: AIQ) might be a great pick.
The ETF holds a cross section of the AI industry
The Global X ETF invests in companies selling the hardware components that facilitate AI development, and it also invests in companies that can benefit from integrating AI into their existing products and services.
The ETF holds 84 stocks, but it's heavily weighted toward its top 10 positions, which account for 35.3% of the total value of its portfolio. That top 10 includes many of the most popular AI stocks investors have raced to buy over the past year:
Stock | Global X ETF Portfolio Weighting |
|---|---|
1. Nvidia | 5.2% |
2. Tencent Holdings | 3.6% |
3. Netflix | 3.5% |
4. Oracle | 3.4% |
5. Broadcom | 3.4% |
6. Meta Platforms | 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 soaring, and the company's revenue has grown by triple-digit percentages in each of the last four quarters. Nvidia recently launched a new series of chips based on its Blackwell architecture, which will extend its dominance in the industry.
Oracle operates some of the best AI data center infrastructure in the world, most of which runs on Nvidia's chips. Amazon also operates Nvidia-powered AI data centers, but it designed its own chips to offer developers an alternative. The company continues to integrate AI into its e-commerce, streaming, and advertising businesses, too.
Netflix and Meta Platforms are good examples of companies using AI to enhance their existing products. AI powers the recommendation engine on Netflix's streaming platform to show users the most relevant content. Similarly, AI curates the content feeds on Meta's Facebook and Instagram social networks. But Meta also built the world's largest open-source large language model (LLM), called Llama, which will pave the way for exciting new AI applications.
The Global X ETF holds a number of other popular AI stocks outside of its top 10, including Microsoft, Tesla, Micron Technology, and Datadog.
Beating the S&P 500 over the long term
The Global X ETF is up 13.4% so far this year, lagging behind the S&P 500 index, which is up 15%. However, the ETF was outperforming the index on the year until it fell 3.1% in July due to steep losses in AI stocks like Nvidia. The S&P 500 is trading flat in July, as investors rotated into stocks outside of the tech space, which insulated the index from losses.
But it's a different story longer-term. The Global X ETF was established in 2018, and it has delivered a compound annual return of 15.6% since then (after fees), which crushes the 13.1% average annual gain in the S&P 500 over the same period. That 2.5% differential makes a big difference in dollar terms thanks to the effects of compounding:
Starting 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 |
Calculations by author.
AI could be one of the most valuable tech booms in history. Nvidia CEO Jensen Huang believes data center operators will spend $1 trillion upgrading and expanding their infrastructure over the next five years, in order to meet demand from AI developers. Consulting firm PwC, on the other hand, believes the AI industry as a whole will add $15.7 trillion to the global economy by 2030.
If those forecasts are correct, the Global X ETF should outperform the S&P 500 long into the future. However, as we've seen in July, investor sentiment can flip very quickly and trigger a period of underperformance. So, if AI fails to live up to the hype, losses in stocks like Nvidia could weigh on the potential returns of the ETF, and that's a key risk investors must consider.
Buying the Global X ETF as part of a diversified portfolio and holding on for the long term is likely the best way to go.
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Suzanne Frey, an executive at Alphabet, 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. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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 Alphabet, Amazon, Apple, Datadog, Meta Platforms, Microsoft, Netflix, Nvidia, Oracle, Qualcomm, Tencent, and Tesla. The Motley Fool recommends Broadcom 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.
Nvidia, Alphabet, and Microsoft Are Sinking This Month. Here's a Safer Way to Invest in Artificial Intelligence (AI) Stocks. was originally published by The Motley Fool