Investing in artificial intelligence (AI) stocks can be risky, but here’s a fantastic way to do it

The artificial intelligence (AI) industry is still relatively new, but it’s primarily for investors right now because of the incredible returns generated by stocks like Nvidiawhich has grown by more than 700% since the start of 2023 alone. Artificial intelligence has the potential to drive productivity growth in the global economy that could create unprecedented economic value in the coming years.

But past technological revolutions like the Internet, enterprise software, and cloud computing have taught us that not every company thrives — or even survives — in the long run. Therefore, investors looking to own AI stocks should prepare for volatility, even among industry leaders. After all, even Nvidia stock recently suffered a 27% peak-to-low decline between June and August.

But there is a way investors can cut through the noise and even avoid having to pick winners and losers in the AI ​​race altogether.

Image source: Getty Images.

An exchange traded fund could be the answer

An exchange-traded fund (ETF) can hold dozens or even hundreds of individual stocks to track the performance of a specific industry, such as AI. Many ETFs are actively managed, meaning a team of professionals will adjust the portfolio as needed so investors can take a passive approach.

Because an ETF can hold so many stocks, it usually won’t suffer a catastrophic loss if one or two companies fail. This is an ideal feature in an industry like AI, as it is almost impossible to predict which companies will succeed or fail in the coming years.

With that in mind, here’s why Roundhill Generative AI and Technology ETF (CHAT -0.23%) could be a great option for investors.

Every popular AI stock is packaged into a single ETF

Roundhill executives believe that AI will be one of the most impactful technologies in the coming decades. On its website, the ETF cites a Goldman Sachs report suggesting that AI could add $7 trillion to the global economy by 2032.

To capture some of that value, the Roundhill ETF holds 55 different stocks, spread across both the hardware and software segments of the AI ​​industry. Its top 10 holdings, in particular, include some of the most popular AI stocks that investors have been begging to own over the past year:

Data source: Roundhill. Portfolio weights are accurate as of August 27, 2024 and are subject to change.

According to the table above, those 10 holdings alone represent 43.8% of the total value of the ETF’s entire portfolio. This level of concentration can be risky because the fund’s performance is often driven by only a small number of stocks. That being said, it is a very high quality list of names.

Nvidia designs the most powerful data center chips for AI development. Demand continues to outstrip supply for its flagship graphics processing units (GPUs) such as the H100 and H200, and conditions could tighten further as the company ramps up shipments of new Blackwell-based GPUs to the end of this year. They will provide a significant increase in performance while reducing power consumption and cost of ownership for data center operators.

Microsoft, Alphabet and Amazon are three of Nvidia’s biggest customers. They fill their data centers with GPUs and lease computing power to their cloud customers, who use it to develop AI and deploy it in their businesses. In addition, all three tech giants have developed AI chatbots and virtual assistants of their own that they incorporate into some of their legacy products.

The Roundhill ETF also holds several other important AI stocks outside of its top 10 holdings. These include Oraclewhich operates some of the best AI infrastructure in the world and Micron technologya leading supplier of memory and storage chips that are increasingly important to the AI ​​revolution.

The Roundhill ETF offers solid returns

The Roundhill ETF was just established in May 2023. It has traded up 40% since then, which beats the 34% return of S&P 500 index in the same period. Perhaps that’s no surprise since the ETF has a much larger allocation to Nvidia, for example, which is the best-performing stock in the entire S&P 500 this year (as it was last year).

If AI continues to add trillions of dollars to the global economy, then the Roundhill ETF is a great place for investors to park their money. However, investors need to be aware of the concentration risk I highlighted earlier, because if AI fails to live up to the hype, stocks like Nvidia will almost certainly lose a chunk of their value. This could lead to a period of underperformance for the ETF.

The Roundhill ETF also has an expense ratio of 0.75%, with a proportion deducted from the fund each year to cover management costs. Some ETF issuers, such as Vanguard, charge expenses as low as 0.03%, but the Roundhill ETF is actively managed and highly specialized, so a premium is to be expected. However, high expense ratios can hurt returns for long-term investors, so it’s something to keep in mind.

However, buying the Roundhill ETF can be a great alternative to picking a basket of individual AI stocks, especially for investors who don’t have time to follow every development in this fast-moving industry.