Investing in Artificial Intelligence (AI) Stocks Can Be Risky, but Here’s a Fantastic Way to Do It

Artificial intelligence (AI) is a key driver of stock market returns right now. This year alone, one-third of the 15.8% gain in the S&P 500 index is attributable to one stock: Nvidia. The company makes the world’s most powerful data center chips for developing AI and simply can’t keep up with demand.

But not every company flying the AI flag is trading in the green in 2024:

• Upstart stock is down 39% year to date.
• Snowflake stock is down 29%.
• Lemonade stock is down 4%.

It isn’t always easy to pick winners and losers in an emerging segment of the technology sector that is still finding its feet. However, AI does present a substantial opportunity, and most estimates on Wall Street suggest it will add trillions of dollars to the global economy over the long term. Investors don’t need a crystal ball to profit from that value creation.

Image source: Getty Images.

An exchange-traded fund might be the answer

An exchange-traded fund (ETF) can hold dozens or even hundreds of stocks neatly packaged into one security. The portfolio is usually designed to offer exposure to a specific market segment, and it’s managed by professionals who make adjustments as necessary. That allows investors to sit back and take a passive approach.

Several AI-focused ETFs have come to market over the last few years, and the Global X Artificial Intelligence and Technology ETF (AIQ -0.03%) is a great option for investors looking for balanced exposure to the industry. It holds all of the most popular AI stocks and has outperformed the S&P 500 since its inception in 2018.

The most popular AI stocks packed into one ETF

The Global X ETF invests in hardware and software companies that will benefit from the further development and deployment of AI. It holds 85 different stocks, but it’s heavily weighted to its top 10 holdings, which account for 36.5% of the total value of its portfolio. That list includes most of the leading AI stocks investors have clamored to buy over the past year:

Data source: Global X. Portfolio weightings are accurate as of June 27, 2024, and are subject to change.

As I touched on earlier, Nvidia designs the best graphics processing units (GPUs) for the data center, which enable developers to train and inference AI models. In the recent fiscal 2025 first quarter (ended April 28), its data center revenue rocketed higher by 427%, compared to the year-ago period, to a record $22.6 billion. In other words, this company is delivering the results to back up the 156% year-to-date gain in its stock price.

Companies like Netflix and Meta Platforms are using AI to advance their businesses. AI powers the recommendation engine on the Netflix streaming platform and on the Facebook and Instagram social networks, so users see the content most relevant to them. Meta also developed the world’s largest open-source large language model (LLM), called Llama, which will open the door to a host of new AI features for its platforms.

Amazon, Alphabet, and Microsoft are the three largest providers of cloud services and are among Nvidia’s biggest customers. They offer developers the computing power they need to train AI, in addition to ready-made LLMs to accelerate the buildout of AI applications.

Outside of its top 10, the Global X ETF holds a number of other leading AI stocks. It owns a stake in Apple, which could soon become the largest distributor of AI to consumers, and Tesla, which Cathie Wood calls the biggest opportunity in AI thanks to its self-driving software. Salesforce, Micron Technology, and Uber Technologies are three more notable names in this ETF.

The Global X ETF is outperforming the S&P 500

The Global X ETF has an expense ratio of 0.68%, which represents the portion of the fund deducted each year to cover management costs. That makes it more expensive than many ETFs by leading issuers, like Vanguard, for example.

However, even after accounting for the annual fee, the ETF has delivered a compound annual return of 15.3% since its establishment in 2018. That beats the 12.3% return delivered by the S&P 500 index, and while the gap doesn’t appear very wide, the extra 3% makes a big difference in dollar terms:

Calculations by author.

If AI continues to drive stock market returns, this ETF could outperform the broader market for years to come. However, if AI fails to live up to the hype, stocks like Nvidia could erase some of their recent gains, which would lead to a period of underperformance for the ETF. That is a very real risk investors should consider before buying any fund that is so heavily weighted to a handful of stocks in a very specific market segment.

With that said, the Global X ETF is a great option for investors seeking exposure to AI, as long as they buy it as part of a balanced portfolio.

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. Suzanne Frey, an executive at Alphabet, 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, Lemonade, Meta Platforms, Microsoft, Netflix, Nvidia, Oracle, Qualcomm, Salesforce, Snowflake, Tencent, Tesla, Uber Technologies, and Upstart. 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.