Outperform the S&P 500 by Investing in AI Stocks Through an Exceptional ETF | The Motley Fool

Outperform the S&P 500 by Investing in AI Stocks Through an Exceptional ETF | The Motley Fool

The S&P 500 delivered a 24% return in 2023, which was more than twice its average annual gain going back to its inception in 1957. However, it was obliterated by tech giants like Nvidia, Amazon, Microsoft, and Meta Platforms (to name a few):

NVDA data by YCharts

What do those companies have in common? They are leaders in the artificial intelligence (AI) industry. Nvidia designs the most sought-after semiconductor hardware for AI workloads in the data center, and companies like Amazon and Microsoft are distributing some of the most powerful AI models to businesses via their cloud computing platforms.

Investors have dozens of quality AI stocks from which to choose, but separating the winners from the losers over the long term won’t be easy given the speed with which this new industry is moving.

Exchange-traded funds can help solve that problem

Buying an exchange-traded fund (ETF) might be a better option than building a portfolio of individual stocks. ETFs can give investors exposure to some of the best AI companies, and they are managed by professionals who adjust the portfolio as necessary.

Plus, an ETF can hold dozens or even hundreds of stocks, so one underperforming company won’t lead to catastrophic financial losses for investors. That’s an important benefit because failures are inevitable with any new tech revolution.

The Global X Artificial Intelligence and Technology ETF (AIQ -0.15%) might be a great choice for investors. Not only does it hold shares in nearly every leader in the AI industry, it’s also beating the S&P 500 over the short and long term.

Global X Artificial Intelligence and Technology invests in companies that stand to benefit from AI and the hardware providers that underpin its development. It holds 84 stocks, but its top 10 positions account for 33% of the total value of its portfolio.

That level of concentration can make the ETF susceptible to downside moves in just a few names. However, its top 10 is a Who’s-Who of the AI world:

Stock

ETF Portfolio Weighting

1. Nvidia

4.23%

2. Meta Platforms

3.6%

3. Netflix

3.5%

4. Amazon

3.24%

5. Oracle

3.14%

6. Tencent Holdings

3.12%

7. Qualcomm

3.09%

8. IBM

3.08%

9. Salesforce

3.06%

10. Broadcom

3.02%

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

Nvidia sitting atop an AI ETF is unsurprising, given it has created more value than any other company in the industry so far. Meta is in the No. 2 spot because AI powers the content recommendation engine for its social media platforms, Facebook and Instagram, and it helps advertisers craft more engaging content. Plus, Meta continues to develop its open-source AI model called Llama, which could underpin several new features in the future.

Oracle is an AI stock I believe has incredible potential, because it operates some of the most efficient data center infrastructure to help developers build AI models quickly, and at a relatively low cost. Broadcom, on the other hand, is tackling AI on a number of fronts.

Outside of the fund’s top 10 holdings, investors will find Microsoft, Alphabet, Apple, and Tesla. The ETF also holds Micron Technology, which is an increasingly important AI semiconductor stock, and C3.ai, which is a small (but growing) enterprise AI stock.

Global X Artificial Intelligence and Technology is beating the S&P 500

The blockbuster gains from the leading AI stocks has driven the Global X Artificial Intelligence and Technology to market-beating returns. It’s beating the S&P 500 year to date, as well as on a one-year and five-year basis:

Instrument

2024 Year to Date Return

1-Year Return

5-Year Return (CAGR)

Global X Artificial Intelligence and Technology ETF

11.8%

48.5%

15.2%

S&P 500

10.8%

32.3%

13.1%

Data source: Global X, Google Finance, and Officialdata.org. CAGR = compound annual growth rate.

Past performance doesn’t predict future results. However, Wall Street has issued staggering forecasts for the financial potential of AI. Goldman Sachs thinks the technology will add $7 trillion to the global economy in the next decade. Consulting firm PwC thinks it will add $15.7 trillion to the economy by 2030, and Cathie Wood‘s Ark Invest places that figure at a whopping $200 trillion.

Global X Artificial Intelligence and Technology offers investors a cross-section of the entire industry, so if AI adds anywhere near as much value as the Street expects, the ETF will likely outperform the S&P 500 long into the future. However, the ETF could significantly underperform if AI doesn’t live up to the hype.

That’s the risk to owning a heavily concentrated ETF, so it might be a good idea to buy Global X Artificial Intelligence and Technology as part of a diverse portfolio of other ETFs (or individual stocks outside the AI sector).

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. 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, Goldman Sachs Group, Meta Platforms, Microsoft, Netflix, Nvidia, Oracle, Qualcomm, Salesforce, and Tesla. The Motley Fool recommends Broadcom, C3.ai, 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.

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