Artificial intelligence (AI) was the dominant theme in the stock market in 2024. There were standout performances from select AI chip stocks, AI software stocks and even energy stocks, while energy-hungry data centers boosted electricity demand.
But picking the individual winners and losers won’t be easy. Advanced micro devices Share prices are up 50% in the first few months of 2024, but are on track to end the year down by 10%. Predicting that chain of events would have been impossible 12 months ago, especially since AMD is now a leading supplier of AI chips.
As a result, most investors might be better off buying AI-focused Exchange Traded Funds (ETFs), which can provide diversified exposure to this technological revolution.
It’s common for ETFs to hold hundreds or even thousands of individual stocks, but since the AI industry is still in its early stages, most ETFs in this space only hold a few dozen names. As a result, they are highly concentrated and investors should only buy them as part of a balanced portfolio of other funds and individual stocks.
That said, investors should look for AI ETFs with diverse sector exposure. In other words, a good ETF will hold shares in AI hardware companies NvidiaAI software companies love it Microsoftand even companies deploying AI in their existing operations, such as Metaplatforms or ServiceNow.
While AI will likely create a significant amount of value, past technological developments (such as the Internet) have taught us that volatility is part of the journey: some companies will succeed, while others will fail completely. By owning a portion of each AI segment, investors can maximize their chances of generating positive returns on a consistent basis.
This is a quintessential AI fund, as its sole purpose is to invest in companies developing the infrastructure, platforms and software that will drive the AI revolution forward.
The ETF holds just 50 stocks and is relatively top-heavy as the five largest holdings alone represent 26.6% of the portfolio’s total value:
|
Stock
|
Roundhill ETF Portfolio Weighting
|
|
1. Nvidia
|
7.69%
|
|
2. Alphabet
|
5.75%
|
|
3.Microsoft
|
5.34%
|
|
4. Metaplatforms
|
4.16%
|
|
5. Taiwanese semiconductor manufacturing
|
3.67%
|
Data source: Roundhill Investments. Portfolio weights are accurate as of December 23, 2024 and are subject to change.
That group of five stocks is diversified in itself. Nvidia and Taiwan Semi cover the AI hardware side, Alphabet and Microsoft are investing heavily in AI software and Meta is integrating AI into its social networks Facebook and Instagram.
Outside of the top five holdings, the Roundhill ETF owns several other popular AI stocks, such as Palantir Technologies, OracleAnd Apple. It also has small positions in it Vistra energy And Constellation Energywho have signed major deals with technology companies to supply electricity for their AI data centers.
The fund was only founded in 2023, so it doesn’t have a very long track record for investors to analyze. However, it has generated a whopping 38% return by 2024, crushing both countries S&P500which is an increase of 24%, and the Nasdaq-100which is an increase of 31%.
The ETF has an expense ratio of 0.75%, which is the portion of the fund that is deducted annually to cover management costs. That is relatively high, even for a highly specialized fund. Most low-cost ETFs issued by Vanguard have an expense ratio of less than 0.1%, and even the iShares ETF (which I’ll discuss in a moment) has an expense ratio of just 0.47%.
That may be the only downside to owning the Roundhill ETF. However, it certainly made up for the high cost in 2024 thanks to its incredible returns, and that could be the case again in 2025 if AI stocks continue to soar higher.
The iShares ETF was founded in 2018 with a focus on robotics and AI, but changed its name and objective in August 2024. Now it aims to invest across the entire value chain of companies in the AI race, including companies building AI infrastructure. developing generative AI, providing AI services and more.
Like the Roundhill ETF, this fund also contains only 50 stocks. The top five holdings account for 23.4% of the total portfolio value, and each of them operates in the AI hardware segment:
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Stock
|
iShares ETF Portfolio Weighting
|
|
1. Broadcom
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5.69%
|
|
2. Arista Networks
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4.73%
|
|
3. Nvidia
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4.50%
|
|
4. Advanced micro devices
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4.29%
|
|
5. Vertiv Holdings
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4.19%
|
Data source: iShares. Portfolio weights are accurate as of December 23, 2024 and are subject to change.
Broadcom and Arista Networks provide data center network equipment that allows operators to optimize their infrastructure. However, Broadcom also makes AI accelerators, which are custom data center chips that some tech giants use as an alternative to Nvidia’s graphics processing units (GPUs).
Advanced Micro Devices, on the other hand, is a direct competitor to Nvidia in the data center GPU market. Additionally, it is a leading supplier of AI chips for personal computers, which could be a major growth driver for the company in the coming years as more AI workloads are processed on devices.
The iShares ETF is slightly more diversified when you look beyond the top five holdings. It has a stake in many of the AI favorites like Palantir, AmazonAlphabet, Microsoft and Metaplatforms.
Because the iShares ETF only restructured its portfolio on August 12 this year, its performance history is extremely short. Since then, however, the stock has risen 24%, which is almost double the gain the S&P 500 made during the same period. However, a period of four months is not long enough to draw any real conclusions.
Nevertheless, based on the quality of its portfolio, this seems like a great ETF to buy in 2025. If AI remains the dominant theme in the stock market next year, it should perform very well.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Arista Networks, Meta Platforms, Microsoft, Nvidia, Oracle, Palantir Technologies, ServiceNow, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Constellation Energy and recommends the following options: long calls for $395 in January 2026 at Microsoft and short calls in January 2026 for $405 at Microsoft. The Motley Fool has a disclosure policy.
Two Artificial Intelligence (AI) ETFs You Can Buy with Confidence Leading to 2025 was originally published by The Motley Fool
