Chipmaker giant Nvidia reported its second-quarter financial results after the stock market closed Wednesday, and the numbers were, as expected, impressive. The company reported a 122% increase in sales in the quarter ending in July, along with profits that beat Wall Street expectations.
Shares were down about 6% Thursday.
It’s rare for a company to post better-than-expected results to send its stock price plummeting, but Nvidia is an outlier. Shares are up 146% for the year and 2,700% over the past five years. At this point, investors are probably starting to wonder if they’ve already priced in astronomical expectations for future growth into the current stock price.
That’s a good reason to wonder whether it’s worth taking a more diversified approach to investing in artificial intelligence. After all, if AI is believed to revolutionize the way American companies do business, Nvidia will be far from the only big beneficiary.
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One way to get broad exposure to AI stocks is through an exchange-traded fund. By owning such a fund, you can not only cast a wide net for future AI winners, but it also helps mitigate the risk that your portfolio will be dragged down by a name that ultimately underperforms.
“If you believe in the general trend toward artificial intelligence, you have to understand that not all stocks are going to go up or down the same way, and so an ETF gives you the chance to participate in the trend while mitigating some of those risks,” says Todd Rosenbluth, head of research at TMX VettaFI.
How an AI ETF can fit into your portfolio
Finding an AI ETF that’s right for you will take a little more effort than simply typing “artificial intelligence” into your broker’s search bar. Any fund company can add “AI” to a fund’s name in hopes of attracting investors interested in a hot trend.
Typically, you’ll find AI mentioned in four types of funds, Rosenbluth says.
1. AI Stock Pickers
These funds do not necessarily invest in companies with a link to AI. Rather, they use AI in their stock selection strategy.
“It’s no different than T. Rowe Price or Fidelity or other firms that pick stocks,” Rosenbluth says.
2. Fund for AI and robots
A few funds focus on the intersection of AI and robotics and own companies related to either sector, or both.
“It’s clear that these are not going to be pure AI innovations or pure robotics innovations,” Rosenbluth says.
3. Generative AI Fund
These funds focus on companies involved in generative AI technology found in tools like ChatGPT and Google Gemini. They tend to hold large, well-known tech companies at the top of the portfolio. Top holdings in one such fund offered by Roundhill Investments include Nvidia, Microsoft, Alphabet, and Meta.
4. AI Beneficiary Funds
While previous funds have focused on large tech companies that produce AI tools, other funds hold shares in a wider variety of companies that stand to benefit from the technology’s proliferation.
“They’re more diversified at the holding level,” Rosenbluth says. “They’re not as focused on mega-cap stocks, and they own other companies outside of the Magnificent Seven to get exposure to AI.”
How to choose an ETF
To choose the right ETF for you, start by reading the fund’s fact sheet and prospectus to understand the fund’s objectives. Then look at the portfolio.
“One of the benefits of an ETF is daily transparency,” Rosenbluth says. “You can go to the fund’s website, or anyone’s website, and see the top 10 holdings.” In fact, most ETFs disclose their entire portfolio daily on free, public websites.
If you think you’ve found an ETF that’s right for you, compare the portfolio to your current holdings. Ideally, a thematic ETF can serve as a complement to your core portfolio, Rosenbluth advises.
Let’s say your core portfolio is a fund that tracks the performance of the Nasdaq-100, which favors stocks of large, growth-oriented companies. Adding a generative AI fund, which holds many of the same names at the top of the portfolio, may not have a significant impact on your performance, Rosenbluth says. You could favor a broader ETF focused on AI.
Conversely, if you have a more comprehensive core portfolio, adding a more focused AI fund “can tilt that core portfolio toward growth and toward that theme,” Rosenbluth says.
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