Looking to buy an artificial intelligence (AI) ETF? Buy this ETF instead

One of the easiest and smartest moves you can make as an investor is buying exchange-traded funds (ETFs). ETFs do much of the hard work of investing for you, keeping your portfolio diversified and rebalancing its holdings based on the preferences of an active manager or the underlying index the fund tracks. The only real challenge is finding the best ETF for your investment goals.

There is an ETF for almost every type of investor. ETFs can be designed to track an index fund such as S&P 500 or Nasdaq-100or they can direct your holdings to focus on value stocks, growth stocks, dividend stocks, healthcare stocks, etc.

Interest in artificial intelligence (AI) ETFs has surged these days as the innovative technology has sparked a new gold rush in the tech sector. But if you want to invest in AI-focused ETFs, it’s better to move away from traditional AI ETFs and take an alternative approach.

Image source: Getty Images.

AI ETFs tend not to give you what you want

It’s difficult to define an artificial intelligence (AI) stock right now. Almost every investor out there knows Nvidiabut beyond the AI ​​chip leader, dozens if not hundreds of companies claim varying degrees of exposure to the emerging technology.

Looking at the largest AI ETFs, you’ll notice a pattern. These funds do not hold the stocks that are generally considered household names in AI. The chart below shows the top five holdings (in percentage terms) in three AI ETFs: ETF Global X Robotics & Artificial Intelligence (BOTZ -3.11%), ETF Robo Global Robotics and Automation Index (ROBO -2.38%)and iShares Future AI & Tech ETF (ARTY -2.93%).

Source: Yahoo! Finance.

As you can see, these funds hold a wide range of stocks from industries beyond technology, including industrials, healthcare, and even media. With the notable exception of Nvidia on the Global X Robotics & AI ETF, this list probably looks a lot different than you’d expect.

It does not include any of the other “Magnificent Seven” stocks that are well-positioned to capitalize on the AI ​​boom, and it does not include other representatives of the semiconductor sector, which have risen on high expectations for the new technology.

As you can see from the chart below, the Global X ETF is the only one of these three funds to outperform S&P 500 since early 2023, when the AI ​​boom started to pick up speed after the launch of ChatGPT in late 2023, and all three of these stocks have underperformed Nasdaq Composite.

Data by YCharts.

A better ETF to consider

If you’re looking for an ETF to give you exposure to stocks benefiting from today’s AI boom, a better choice is VanEck Semiconductor ETF (SMH -4.13%)which invests in a wide range of leading semiconductor stocks.

The VanEck Semiconductor ETF’s top five holdings are Nvidia, Taiwan Semiconductor MANUFACTURING, Broadcom, Texas Instrumentsand Advanced microdevices. Together, these five stocks represent about 50% of the fund.

The ETF is also up 122% since the start of 2023, showing that it is capitalizing on the AI ​​boom more than the AI-targeted ETFs above.

Data by YCharts.

Looking ahead, the semiconductor ETF also looks like a good bet to continue outperforming the alternatives above. That’s because semiconductor stocks are well-positioned in the AI ​​revolution as building blocks of new technology. In other words, these stocks are likely to do well before companies involved in AI applications such as Intuitive Surgical, ABB or Keyence.

Additionally, the VanEck Semiconductor ETF also looks surprisingly affordable at a price-to-earnings ratio of 19.5, making the ETF cheaper than the S&P 500 in addition to the three ETFs above.

Even though stocks like Nvidia have already soared on high expectations for the AI ​​revolution, several chip stocks in the ETF are still surprisingly affordable. The SMH ETF offers a great way to take advantage of a low price on the fast-growing sector.