1 spectacular ETF that can help you benefit from the artificial intelligence (AI) boom

The Internet boom culminated in a spectacular collapse in the early 2000s, teaching investors that it is difficult to pick winners and losers during a technological revolution. Many companies cannot survive when the dust settles, and only some manage to thrive.

It is also difficult to predict what the economic landscape will look like in the coming years. When Amazon When the company started using the Internet to sell books, it had no idea that most of its profits would eventually come from the cloud computing business – because it didn't even exist at the time.

The current artificial intelligence (AI) revolution is likely to be no different. Semiconductor giants like Nvidia are currently creating incredible added value from AI. And yet some analysts predict that the software side of the industry could soon get even bigger.

Instead of trying to pick AI winners and losers, investors should instead consider purchasing an AI-focused exchange traded fund (ETF). An ETF can hold dozens of different stocks, so one or two failures usually won't result in catastrophic losses for the entire fund. Here's why iShares Future AI and Tech ETF (ART 0.87%) could be a great option.

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A diversified AI fund

This iShares ETF was founded in 2018 with a focus on robotics and cross-sector AI, but 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 to wear. This includes companies developing generative AI, AI infrastructure, AI software, AI data solutions and more.

The ETF holds holdings in 46 stocks, but is heavily focused on its top 10 holdings, which account for 40.8% of its portfolio's total value:

Data source: iShares. Portfolio weights are as of September 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 creation currently takes place. Nvidia supplies the industry's most powerful data center graphics processing units (GPUs) for AI development and is struggling to keep up with demand. Advanced Micro Devices is an emerging competitor to Nvidia, but the company has also taken a leading position in the market for AI chips in the personal computing segment.

Broadcom, on the other hand, is a diverse AI company. It makes custom AI accelerators (chips) for major tech giants and data center networking hardware such as Ethernet switches. Additionally, Broadcom's subsidiaries are deploying AI in cybersecurity, cloud, and more.

But the iShares ETF also holds a diverse group of AI stocks beyond the hardware segment. For example, Meta Platforms developed Llama, the most popular open source Large Language Model (LLM) used to develop new AI features for Facebook and Instagram. Then there's CrowdStrike, a leading provider of AI-powered cybersecurity software.

Outside of its top 10 holdings, the iShares ETF holds key AI stocks like MicrosoftAmazon, Taiwan semiconductor manufacturingand more.

Because it is a specialized fund, it is more expensive to own than an ETF that simply tracks an index like this S&P 500. The expense ratio is 0.47%, which is the portion of the fund that is deducted each year to cover management costs. For the perspective that Vanguard S&P 500 ETF has an expense ratio of just 0.03%. There are no ongoing fees for holding individual stocks, so investors should consider these costs before purchasing an ETF.

Potential for solid long-term returns

The iShares ETF can be prone to volatility due to its concentration, meaning a small number of stocks can have a significant impact on its performance. However, investors do not need to study much historical data as the ETF in its current form is only two months old.

Looking ahead, AI infrastructure spending is expected to continue rising for at least the next year, meaning stocks like Advanced Micro Devices, Broadcom and Nvidia are likely to do well for the foreseeable future. After plunging 51% so far this year, Intel could soon find its footing as well, as it is rumored to be a takeover target that could help the company regain some value.

AI software stocks like Meta Platforms, CrowdStrike and Alphabet could also provide a source of upside for the ETF next year. Meta and Alphabet are trading at very attractive valuations and 2025 could be a strong recovery year for CrowdStrike.

In summary, investors seeking exposure to the AI ​​industry should consider purchasing this ETF as an alternative to selecting a group of individual AI stocks. However, it is important to do this as part of a balanced portfolio to protect against potential volatility.