AI Is Entering Its Next Phase. These 5 ETFs Could Benefit.

Companies like Nvidia and Micron Technology have become some of the faces of the artificial intelligence (AI) revolution.

From a stock market perspective, however, leadership in the AI trade has shifted multiple times. What started with the hyperscalers has transitioned to semiconductor chips to memory stocks and, more recently, cybersecurity names.

Because of this rapid evolution, I usually suggest that investors consider a more broadly diversified investment, such as the Global X Artificial Intelligence & Technology ETF. But there are unquestionably unique opportunities in these sub-themes.

Here are the five ETFs I'd consider for each segment of the AI trade.

Image source: Getty Images.

1. The foundation of AI is chips

The VanEck Semiconductor ETF (NASDAQ: SMH) is still one of the most foundational ways to invest in AI infrastructure.

If the first wave of AI development was built around training increasingly more powerful and complex large language models, the next phase could see even stronger demand for massive computing power as inference demand grows.

Nvidia accounts for 19% of this portfolio, but it also holds stakes in other chip manufacturers, equipment makers, memory providers, and other segments of the semiconductor supply chain.

2. AI operates in the cloud

The First Trust Cloud Computing ETF (NASDAQ: SKYY) could be a good indicator of where this industry goes next.

Businesses will still need access to computing resources and other AI services through the cloud. That will make cloud infrastructure a vital piece of the engine that bridges those companies building AI capabilities and the businesses that will ultimately use them.

This ETF currently holds 65 companies, including Everpure, DigitalOcean Holdings, and Arista Networks.

3. Turning AI into productivity and automation

The iShares Expanded Tech-Software Sector ETF (NYSEMKT: IGV) represents perhaps the most under-appreciated piece of the AI trade.

Companies selling various AI components are making money now. But the businesses creating the software solutions built on those foundational components will be in line to profit as well. If AI can deliver productivity gains through automation, analytics, coding, and other business applications, software companies will grow quickly.

This ETF holds just over 100 names, but 35% of assets are concentrated in Palo Alto Networks, Palantir, CrowdStrike, and Microsoft.

4. Solving the cybersecurity problem

The First Trust Nasdaq Cybersecurity ETF (NASDAQ: CIBR) benefits from the unfortunate side of the AI boom. Cybercrime becomes more scalable and easier to execute.

Companies were already spending a lot of money to protect themselves. Those budgets will only need to increase as AI development outpaces the ability to handle cybersecurity threats. This could become one of the more durable opportunities emerging from the AI trade.

Major players, including CrowdStrike, Fortinet, Palo Alto Networks, Cisco Systems, and Broadcom, are the fund's five biggest holdings.

5. The biggest bottleneck is electricity

The First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index Fund (NASDAQ: GRID) might be one of the more controversial parts of the AI trade. I'm talking about the companies getting the electricity to the data centers that need it.

AI requires a large amount of power to operate. The infrastructure is struggling to keep up with demand, but this ETF holds the companies involved in upgrading and expanding that infrastructure. This ETF doesn't own data center REITs, but it does hold electrical component manufacturers, industrial companies, and electronic equipment producers.

I wouldn't make these ETFs a big part of my portfolio. You probably already have significant exposure to this theme through S&P 500 and total U.S. stock market funds. But I do believe these represent some of the next big phases of the AI trade.

Building out the initial infrastructure was the first phase of the AI trade. How everything is ultimately connected might be the second.

David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Arista Networks, Broadcom, Cisco Systems, CrowdStrike, DigitalOcean, Everpure, Fortinet, Micron Technology, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.