Shares of SoundHound AI, C3.ai and Upstart are down more than 70%. Here’s a safer way to invest in artificial intelligence (AI) stocks.

Nvidia (NVDA 4.05%) shares rose 239% last year and are up another 158% in 2024. In dollar terms, the company added a whopping $2.7 trillion to its market cap in that two-year period, and is now the second the most valuable company in the world.

Nvidia is generating substantial revenue and earnings growth to support its stock’s incredible gains. The company designs the most powerful graphics processing chips (GPUs) for the data center, which are used to develop artificial intelligence (AI) models, and it simply cannot keep up with demand.

Unfortunately, not every AI company will be a winner like Nvidia. Many are struggling to deliver financial results to match their innovation in this fast-moving industry, which has decimated its share prices over the past few years:

• SoundHound AI (SOUND -1.27%) the stock is down 74% from its all-time high.
• C3. have (AI 1.45%) the stock is down 85% from its all-time high.
• Upstart Holdings (UPST 4.56%) the stock is down 89% from its all-time high.

I’m not suggesting that any of these stocks are bad investments today. I’m just pointing out how difficult it is to pick winners and losers in new industries like AI, because no one really knows what the future landscape will look like. Therefore, investors may want to consider using a simpler strategy.

Image source: Getty Images.

An exchange traded fund could be the answer

Exchange-traded funds (ETFs) can hold dozens or even hundreds of individual stocks to give investors exposure to a specific segment of the market, such as AI. They are managed by a team of professionals who adjust holdings as needed so investors can take a passive approach.

An ETF with hundreds of stocks 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 iShares Expanded Tech Sector ETF (IGM 1.71%) it could be a great alternative to building an AI stock portfolio on your own.

The iShares ETF holds all the top stocks AI investors could want

The iShares Expanded Tech Sector ETF was founded in 2001, so it has successfully traversed several technological expansions, including the Internet, enterprise software, smartphones, cloud computing and now, AI. It aims to give investors exposure to the hardware, software and related companies that make these innovations possible.

The ETF holds 279 stocks, making it one of the most diversified technology funds investors can buy. However, it is heavily weighted to its top 10 holdings, which represent 53.9% of the total value of its entire portfolio:

Data source: iShares. Portfolio weights are accurate as of October 4, 2024 and are subject to change.

All of the companies above use AI in some capacity. Meta Platforms has developed several AI features for both users and advertisers on its social networks Facebook, Instagram and WhatsApp. The company builds its own large language models (LLMs) called Llama, which power these features. Meta is preparing to release Llama 4 next year, which CEO Mark Zuckerberg says could set a benchmark for the entire AI industry.

Apple dives deeper into AI with each new product release. 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 also add powerful new capabilities to the Siri voice assistant.

Microsoft and Alphabet have both launched AI-powered virtual assistants, and their respective cloud platforms have become key distribution channels for the latest AI models, software and data center computing power for businesses.

Nvidia 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 Blackwell’s latest architecture that will deliver a performance boost of up to 30 times. Nvidia faces growing competition, however, with Advanced Micro Devices quickly becoming a player in the AI ​​data center GPU market.

Oracle, Micron technologyand Palantir are some of the noteworthy AI stocks outside the ETF’s top 10 holdings.

The iShares ETF routinely outperforms the S&P 500 index

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 S&P 500 index in the same period.

However, widespread adoption of technologies such as enterprise software, cloud computing and AI has propelled the ETF to a 20% compounded annual return over the past 10 years. That widened its lead over the S&P 500, which delivered a compounded annual return of just 13.2% over the same period.

The 6.8% difference each year makes a substantial difference in dollar terms due to compounding effects:

Calculations by author.

It will be a challenge for any to maintain an average annual 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 Investment Management puts that figure at $200 trillion by 2030.

Tech stocks are almost certainly the place to be if these predictions prove correct, and the iShares ETF is a great alternative to pick individual winners and losers in the AI ​​race. However, if AI fails to live up to the hype, it’s a good idea to buy this ETF as part of a diversified portfolio that includes exposure to non-tech sectors of the market.