AI-Focused ETFs: A Safer Way to Invest in the Artificial Intelligence Boom

1 Unstoppable Vanguard ETF to Buy During the S&P 500 Bull Market | The Motley Fool

Large technology stocks are leading the S&P 500 higher, and that trend is likely to continue thanks to artificial intelligence. The S&P 500 (^GSPC -0.21%) continues to set new records, extending the bull market that began when the index bottomed in Oct. 2022. The technology sector is leading this incredible run thanks to its powerful earnings growth and innovation in areas like artificial intelligence (AI). Since the S&P 500 is weighted by market capitalization, the largest companies in the index have a greater influence over its performance than the smallest. It's currently sitting on a gain of 20% year to date, significantly better than the 12% gain for the S&P 500 Equal Weight index (which assigns the same weighting to every stock regardless of size). The difference can be explained by the whopping 53.2% average return of the top five S&P 500 stocks this year: Apple, Microsoft, Nvidia, Amazon, and Meta Platforms. Since the AI revolution is still in its infancy, the technology sector will likely continue leading the S&P 500 higher. Therefore, an exchange-traded fund (ETF) with a focus on technology stocks could be a great portfolio addition. Here's why the Vanguard Information Technology ETF (VGT 0.09%) might be the perfect choice for growth-hungry investors. The Vanguard Information Technology ETF holds 317 stocks spread across 12 segments of the tech sector. The semiconductor sector has the highest weighting in the ETF at 28.9%, which is no surprise given the meteoric growth of companies like Nvidia over the past year due to the demand for AI chips. Despite holding a large number of different stocks, the top five positions in the ETF account for 50.3% of the total value of its portfolio. It also holds each of those stocks at a substantially higher weighting than in the S&P 500: Data source: Vanguard. Portfolio weightings are accurate as of Aug. 31, 2024, and are subject to change. All five of the above companies are deploying AI in some capacity. Apple is rolling out its Apple Intelligence software on the latest iPhone, iPad, and Mac devices. It will transform the way its users consume and generate content like texts and emails. And since it's powered by OpenAI, the Siri voice assistant could soon have all the knowledge and capabilities of ChatGPT. Apple has over 2.2 billion active devices worldwide, so it could quickly become the largest distributor of AI to consumers. Nvidia designs the most powerful graphics processing units (GPUs) for the data center, which developers use to build AI models. It's about to scale up shipments of its latest Blackwell-based GPUs, which offer up to 30 times better performance than its flagship H100, which set the benchmark for the industry last year. Broadcom also operates in the AI hardware space. It produces chips and other data center equipment, which includes industry-leading networking solutions. Microsoft and Adobe are quickly becoming AI software powerhouses. Microsoft has developed an AI virtual assistant called Copilot and is also a leading provider of AI services to businesses through its Azure cloud platform. Adobe is integrating AI into its flagship products like Photoshop to unlock new features and automate workflows. Outside its top five positions, the Vanguard ETF holds several other leading AI stocks, including Advanced Micro Devices, Oracle, Micron Technology, and more. The Vanguard ETF has delivered a compound annual total return of 13.5% since it was established in 2004, comfortably outpacing the S&P 500, which rose 10.1% per year over the same period. But thanks to the proliferation of technologies like enterprise software, cloud computing, and AI, the Vanguard ETF has soared at a compound annual rate of 20.7% over the last 10 years. That created an even wider gap over the S&P 500, which grew at an annual rate of 13.2% over that stretch. It's unsustainable for any fund to return more than 20% per year over the long term. However, Nvidia CEO Jensen Huang thinks data center operators will spend $1 trillion building AI infrastructure over the next five years, which will be a big tailwind for the semiconductor sector. Since that's the largest component of the Vanguard ETF, that trend could drive outsized returns for the foreseeable future. Plus, several Wall Street forecasts suggest AI will add trillions of dollars to the global economy in the coming decade. That suggests tech stocks will continue to lead the S&P 500 higher, making the Vanguard ETF a great place to invest. But even if the ETF's returns fall back to a level more in line with its historical average of 13.5%, it should still be enough to match or outperform the S&P 500 over the long term.

Unsure Which AI Stock to Buy? Check Out This ETF That Has Crushed the Market This Year. | The Motley Fool

Investing in artificial intelligence (AI) can be difficult. It's clear that this technology will significantly affect the world, but picking which company to invest in can be tricky. Instead of picking one or two stocks, purchasing an exchange-traded fund (ETF) that is focused on the sector is an alternative. ETFs trade just like stocks but consist of multiple companies, spreading out the risk. One ETF that specializes in companies primed to benefit from AI is the VanEck Semiconductor ETF (SMH 1.44%). This fund holds many companies leading the way in AI products and has plenty of room to continue rising. ETFs are required to disclose what stocks are in their fund, so it's easy to see what you're actually investing in. Here are the top 10 holdings for the VanEck Semiconductor ETF and their current weighting. Data source: VanEck. Makeup is as of 9/30/2024. Clearly, this ETF is weighted heavily toward some AI heavy hitters in Nvidia and Taiwan Semiconductor. These two make up about a third of the fund, which I think is a great strategy. Nvidia's GPUs are powering the AI arms race by developing AI models and running them after they have been trained. Taiwan Semiconductor is a key chip fabricator that makes chips for Nvidia, AMD, Broadcom, and many other big-tech companies. By investing heavily in Nvidia and Taiwan Semiconductor, you're not trying to pick a winner in AI; you're just benefiting from the companies that are selling the tools to compete. This is known as picks-and-shovels investing -- from the days when folks made their fortune supplying prospectors. This is the same idea behind the VanEck ETF: It wins no matter what company ultimately strikes gold in AI. The fund has already had a tremendous year, rising over 40% so far, outperforming the market's return of 21.5% (as measured by the S&P 500). But can it keep it up? The big question surrounding AI investing is how long it will take to build out the computing power necessary to train these models to deliver what clients want. One of the biggest spenders in the AI arms race has been Meta Platforms (NASDAQ: META). Its CEO, Mark Zuckerberg, has said that AI will take years to pay off because it must continue building out infrastructure to compete. Meta also warned investors in its outlook that " ... infrastructure costs will be a significant driver of expense growth next year as we recognize depreciation and operating costs associated with our expanded infrastructure footprint." This suggests that Meta will build even more data center infrastructure in 2025 than in 2024, which is huge news for companies like Nvidia, Taiwan Semiconductor, and other companies within this ETF. And other big tech companies echoed Meta's sentiment, so it's clear that this fund still has lots of room to run. If you're unsure which stock to buy, the VanEck Semiconductor ETF is loaded with companies that are slated to grow tremendously for the foreseeable future, making it a fantastic pick to beat the market.

Shares of SoundHound AI, C3.ai, and Upstart Plummeted by More Than 70%. Here's a Safer Way to Invest In Artificial Intelligence (AI) Stocks. | The Motley Fool

Artificial intelligence (AI) is creating a tremendous amount of value right now, but not every AI company will be a winner. Nvidia (NVDA 4.05%) stock was up 239% last year, and it's up a further 158% in 2024. In dollar terms, the company added a whopping $2.7 trillion to its market capitalization over that two-year stretch, and it's now the second-most valuable company in the world. Nvidia generates substantial revenue and earnings growth to support the incredible gains in its stock. The company designs the most powerful graphics processing chips (GPUs) for the data center, which are used for developing artificial intelligence (AI) models, and it simply can't keep up with demand. Unfortunately, not every AI company will be a winner like Nvidia. Many struggle to deliver the financial results to match their innovation in this fast-moving industry, which has decimated their stock prices over the last few years: I'm not suggesting any of those stocks are bad investments from today. I'm merely highlighting how challenging it is to pick winners and losers in new industries like AI, because nobody truly knows what the landscape will look like in the future. Therefore, investors might want to consider using a simpler strategy. Exchange-traded funds (ETFs) can hold dozens or even hundreds of individual stocks to give investors exposure to a specific segment of the market like AI. They are managed by a team of professionals who adjust the holdings as necessary, so investors can take a passive approach. An ETF with hundreds of stock holdings typically won't suffer a catastrophic loss if one or two companies fail, which is a great feature in an industry like AI with so many unknowns. Here's why the iShares Expanded Tech Sector ETF (IGM 1.71%) might be a great alternative to building a portfolio of AI stocks on your own. The iShares Expanded Tech Sector ETF was established in 2001, so it successfully navigated several technology booms including the internet, enterprise software, smartphone devices, cloud computing, and now, AI. It aims to give investors exposure to the hardware, software, and related companies that make those innovations possible. The ETF holds 279 stocks, so it's one of the most diversified technology funds investors can buy. However, it's heavily weighted toward its top 10 holdings, which account for 53.9% of the total value of its entire portfolio: Data source: iShares. Portfolio weightings are accurate as of Oct. 4, 2024, and are subject to change. All of the above companies are using AI in some capacity. Meta Platforms developed several AI features for both users and advertisers on its Facebook, Instagram, and WhatsApp social networks. The company builds its own large language models (LLMs) called Llama, which power those features. Meta is preparing to launch Llama 4 next year, which CEO Mark Zuckerberg says could set the benchmark for the entire AI industry. Apple is diving deeper into AI with each new product release. Its Apple Intelligence software is now rolling out on the latest iPhones, iPads, and Mac computers. It will transform the way users consume and generate content, and it will also add powerful new capabilities to the Siri voice assistant. Microsoft and Alphabet both launched AI-powered virtual assistants of their own, and their respective cloud platforms have become key distribution channels for the latest AI models, software, and data center computing capacity for businesses. Nvidia's chips power everything I mentioned above. The company's flagship H100 GPU set the benchmark for AI development last year, but it's about to start shipping a new generation of chips based on its latest Blackwell architecture, which will offer a performance boost of up to 30 times. Nvidia does face growing competition, though, with Advanced Micro Devices rapidly becoming a player in the market for AI data center GPUs. Oracle, Micron Technology, and Palantir are some of the noteworthy AI stocks sitting outside the ETF's top 10 holdings. The iShares ETF has delivered a compound annual return of 10.8% since its inception in 2001, which is much better than the average annual return of 8.2% generated by the S&P 500 index over the same period. However, the widespread adoption of technologies like enterprise software, cloud computing, and AI propelled the ETF to a compound annual return of 20% over the last 10 years. That extended its advantage over the S&P 500, which has delivered a compound annual return of just 13.2% over the same period. The 6.8% differential each year makes a substantial difference in dollar terms thanks to the effects of compounding: Calculations by author. It will be a challenge for any fund to maintain an average yearly return of 20% over the long term, but AI could be one of the most valuable technologies in a generation. Goldman Sachs believes it will add $7 trillion to the global economy within a decade, and Cathie Wood's Ark Investment Management places that figure at a whopping $200 trillion by 2030. Technology stocks are almost certainly the place to be if those forecasts prove to be correct, and the iShares ETF is a great alternative to picking individual winners and losers in the AI race. However, just in case AI fails to live up to the hype, it's a good idea to buy this ETF as part of a diversified portfolio which includes exposure to the non-technology sectors of the market.

Beyond Nvidia and Meta Platforms: 1 Spectacular Vanguard ETF to Buy Now | The Motley Fool

The Vanguard Mega Cap Growth ETF is a simple yet effective way to invest in AI-fueled growth. Meta Platforms hit a new intraday high on Oct. 4. Investments in artificial intelligence (AI) are paying off for its core advertising business, and its augmented and virtual reality projects could have potential to contribute earnings growth down the road. Meta is now the hottest stock in the "Magnificent Seven" -- a group of the largest tech-focused companies. But not long ago, Nvidia carried the group higher. And Apple, which had been a significant market laggard earlier in the year, has staged a massive comeback and is up over 33% in the last six months. You may be surprised to learn that every Magnificent Seven stock aside from Meta has been underperforming the S&P 500 over the last three months. The slowdown may be due to valuation concerns that earnings need to catch up with soaring stock prices. Another factor is the broadening of the market rally as stable stalwarts like Coca-Cola, Home Depot, and other blue chip components of the Dow Jones Industrial Average have been roaring higher in recent months and contributing the bulk of index gains. It is useful to be aware of the gyrations of the broader market and major economic events so you know why a stock may be moving a certain way in the short term. But oftentimes, a lot of these movements are just noise and can distract from what investing is all about, which is putting your hard-earned savings to work in companies that can compound in value over time and maybe even return capital to investors through buybacks and dividends. Here's why the Vanguard Mega Cap Growth ETF (MGK 0.86%) is packed with compounding potential and is worth buying now. Investing in an ETF can be freeing because it can smooth out individual stock movements by focusing more on a specific theme, sector, or investment objective. The fund can do well even as market leadership changes. It's less about Apple versus Microsoft or Meta Platforms versus Google parent company Alphabet and more about general industrywide growth. Of course, lower risk can mean lower reward because big gains in a single stock can only move an ETF by so much. But overall, the pros of ETFs can outweigh their cons, especially for investors who are looking for a hands-off tool. The Vanguard Mega Cap Growth ETF is a bold bet on the top growth stocks, especially tech-focused companies. Data source: Vanguard Group. A whopping 62.7% of the fund is invested in just 10 holdings, which is a higher concentration than you'll find in an index like the Nasdaq Composite or the S&P 500, or even a similar ETF like the Vanguard Growth ETF. The Growth ETF has the exact same top 10 holdings as the Mega Cap Growth ETF, just less weighting in the top names and 188 total holdings compared to just 71 in the mega cap growth ETF. At its core, the Vanguard Mega Cap Growth ETF is a bet on the continued outperformance of the most successful and valuable companies relative to the broader indexes. The Vanguard Mega Cap growth ETF has slightly outperformed the Nasdaq Composite and S&P 500 over the last 5- and 10-year periods due to the dominance of the largest market-cap growth stocks. There's reason to believe these companies have what it takes to continue leading the broader market higher for years to come. Mega-cap growth companies should continue doing well as long as they deliver on investor expectations. Solid earnings growth can justify a higher stock price and even valuation expansions. AI, cloud infrastructure, consumer spending, advertising revenue from social media, and enterprise software are all major trends that impact mega-cap tech stocks and are key drivers of earnings growth. Recently, Alphabet and Meta Platforms began paying small dividends to pass along profits directly to shareholders -- which is also a capital return strategy deployed by Microsoft and Apple. All four companies buy back a ton of stock to reduce the impact of stock-based compensation and avoid dilution. As these companies continue to mature, their dividends could become an increasingly important aspect of the investment thesis. With an expense ratio of just 0.07% or $0.70 for every $1,000 invested, the Vanguard Mega Cap Growth ETF is an ultra-low-cost way to invest in the most valuable growth-oriented U.S. companies. Its top-heavy structure magnifies the impact of a single major holding. For that reason, the fund can be volatile if there's a sell-off in multiple top holdings. Still, it's one of those funds where investors know what they're getting. In other words, if the fund begins underperforming the market, it's probably because there's a sell-off in big tech. All told, the Vanguard Mega Cap Growth ETF is an excellent way for long-term investors to target multiple top stocks without incurring sizable fees that can reduce returns over time.

1 Spectacular ETF That Can Help You Capitalize on the Artificial Intelligence (AI) Boom | The Motley Fool

This exchange-traded fund can save investors from picking winners and losers in the AI sector. The internet boom culminated in a spectacular bust during the early 2000s, and it taught investors that it's difficult to pick winners and losers during a technological revolution. Many companies fail to survive once the dust settles, and only some manage to thrive. It's also difficult to predict what the economic landscape will look like in the years ahead. When Amazon started using the internet to sell books, it had no idea most of its profits would eventually come from its cloud computing business -- because it didn't even exist at the time. The current artificial intelligence (AI) revolution will probably be no different. Semiconductor giants like Nvidia are creating an incredible amount of value from AI right now. And yet some analysts predict the software side of the industry could soon be even bigger. Rather than trying to pick AI winners and losers, investors might want to consider buying an AI-focused exchange-traded fund (ETF) instead. An ETF can hold dozens of different stocks, so one or two failures typically won't result in catastrophic losses for the entire fund. Here's why the iShares Future AI and Tech ETF (ARTY 0.21%) might be a great option. This iShares ETF was established in 2018 with a focus on robotics and multisector AI, but it changed its name and restructured its holdings in August to better reflect its more focused goal of investing in companies at the forefront of the AI revolution. That includes companies developing generative AI, AI infrastructure, AI software, AI data solutions, and more. The ETF has holdings in 46 stocks, but it's heavily concentrated toward its top 10 positions, which account for 40.8% of the total value of its portfolio: Data source: iShares. Portfolio weightings are accurate as of Sept. 27, 2024, and are subject to change. Semiconductor stocks occupy the top five spots in the iShares ETF because that's where most of the value is being created right now. Nvidia supplies the industry's most powerful data center graphics processing units (GPUs) for AI development, and it's struggling to keep up with demand. Advanced Micro Devices is an emerging competitor to Nvidia, but the company has also taken a leadership position in the market for AI chips in the personal computing segment. Broadcom, on the other hand, is a multifaceted AI company. It makes custom AI accelerators (chips) for large tech giants and data center networking hardware, like Ethernet switches. Plus, Broadcom's subsidiaries are deploying AI across cybersecurity, the cloud, and more. But the iShares ETF also holds a diverse group of AI stocks beyond the hardware segment. Meta Platforms, for example, created Llama, the most popular open-source large language model (LLM), which it's using to develop new AI features for Facebook and Instagram. Then there is CrowdStrike, a leading provider of AI-powered cybersecurity software. Outside its top 10 positions, the iShares ETF holds key AI stocks like Microsoft, Amazon, Taiwan Semiconductor Manufacturing, and more. Since this is a specialized fund, it's more expensive to hold than an ETF that simply tracks an index like the S&P 500. It has an expense ratio of 0.47%, which is the proportion of the fund deducted each year to cover management costs. For perspective, the Vanguard S&P 500 ETF has an expense ratio of just 0.03%. There is no ongoing fee to hold individual stocks, so investors should consider this cost before buying an ETF. The iShares ETF can be prone to volatility because it's so concentrated, meaning a small number of stocks can have a significant influence over its performance. With that said, investors don't have much historical data to study because the ETF is only two months old in its current form. Looking forward, AI infrastructure spending should continue to grow for at least the next year, which means stocks like Advanced Micro Devices, Broadcom, and Nvidia are likely to do well for the foreseeable future. After crashing 51% this year so far, Intel might also find its footing soon because it's rumored to be a takeover target, which could help the company recover some value. AI software stocks, like Meta Platforms, CrowdStrike, and Alphabet, could also be a source of upside for the ETF over the next year. Meta and Alphabet trade at very attractive valuations, and 2025 could be a powerful bounce-back year for CrowdStrike. In summary, investors seeking exposure to the AI industry should consider buying this ETF as an alternative to picking a group of individual AI stocks. However, it's important to do so as part of a balanced portfolio to protect against potential volatility.