THE S&P500 generated consecutive annual total returns of over 25% in 2023 and 2024. The only other time that has occurred in the history of the index (dating back to 1957) was in 1997 and 1998, during the boom of ‘Internet dot-com.
The technology sector also drove the S&P higher on this occasion, but the catalyst this time is artificial intelligence (AI). Some of the world’s largest companies are leading the charge. Nvidia the stock, for example, has soared more than 840% since the start of 2023, catapulting the company’s value to $3.4 trillion as of this writing.
But the dot-com bubble taught investors that picking winners and losers in an emerging industry can be extremely difficult. This era generated incredible success stories like Amazonbut thousands other businesses have failed. The AI boom could produce a similar result in the long term.
That’s why purchasing an exchange-traded fund (ETF) holding a portfolio of AI stocks might be the smartest way to participate in this tech revolution. Investors can purchase a single share of the Roundhill Generative AI and Technology ETF (CAT 1.61%) for less than $50. Here’s why it’s worth thinking about.
Image source: Getty Images.
Nvidia, Alphabet and Microsoft are among the main holdings of this ETF
ETFs can hold hundreds or even thousands of individual stocks, but the Roundhill ETF only holds 50. This means it is relatively concentrated, which can be a recipe for volatility, so it is primarily suitable investors who already have a diversified portfolio of other ETFs and/or stocks.
The Roundhill ETF invests specifically in companies developing platforms, infrastructure and software that bring AI to life. As this technology is still in its infancy, the list of names in these categories is not very long yet.
That said, the ETF’s top five holdings include a range of AI stars:
|
Action |
RoundHill ETF Portfolio Weighting |
|---|---|
|
1. Nvidia |
7.32% |
|
2. Alphabet |
5.67% |
|
3. Microsoft |
5.18% |
|
4. Metaplatforms |
4.22% |
|
5. Semiconductor manufacturing in Taiwan |
3.65% |
Data source: Roundhill Investments. Portfolio weightings are accurate as of January 16, 2025 and are subject to change.
Nvidia is the leading provider of graphics processing units (GPUs) for AI data centers. These chips have driven its growth over the past two years and will continue to do so in the future, but the company is now eyeing new multibillion-dollar opportunities in areas such as autonomous vehicles and robotics. Therefore, this stock certainly deserves its place at the top of the Roundhill ETF.
Alphabet and Microsoft are also major players in the AI space, having developed their own chatbots and virtual assistants. Their cloud platforms also offer edge computing capability (powered by Nvidia’s chips) and ready-to-use extended language models (LLMs), which companies can rent to develop their own AI applications.
Outside of the top five positions in the Roundhill ETF, he owns several other top AI stocks, like Broadcom, Oracle, Palantir TechnologiesAmazon and Advanced microdevices.
The Roundhill ETF beat the S&P 500 last year
The Roundhill ETF was created in May 2023, so it does not have a very long history for investors to analyze. However, it returned 31% in 2024, comfortably outperforming the S&P 500 (even after accounting for the ETF’s 0.75% expense ratio). This strong result is partly attributable to the average gain of 74% recorded by the ETF’s top five holdings:
Data by YCharts.
As I mentioned earlier, this ETF is too concentrated to be a complete portfolio on its own, and investors should always avoid putting all their eggs in one basket. But it could help boost returns on a diversified portfolio, especially if AI stocks continue to lead the market higher.
If you had invested $10,000 in the S&P 500 at the start of 2024, you would have ended the year with $12,502 (including dividends). But if you split that investment with 70% in the S&P 500 and 30% in the Roundhill ETF, your $10,000 would be worth $12,680 instead.
This doesn’t seem like a huge difference in the short term, but the magic of compounding could lead to significant outperformance in the long term. Of course, AI will need to live up to its lofty expectations for the ETF to continue generating market-beating gains.
Citing a forecast of Goldman SachsRoundhill believes AI could add $7 trillion to the global economy by 2032. Hardware vendors like Nvidia, Taiwan Semiconductor, and Broadcom will benefit, as AI development is not possible without their chips and components. But a lot of the value will also come from the software side thanks to companies like Microsoft, Alphabet, Amazon, Palantir, etc.
Therefore, the Roundhill ETF seems like a no-brainer for investors who are not yet heavily exposed to the AI revolution.
Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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 holds positions and recommends Advanced Micro Devices, Alphabet, Amazon, Goldman Sachs Group, Meta Platforms, Microsoft, Nvidia, Oracle, Palantir Technologies and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom 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.
