How to Invest for an AI Boom, AI Bust, or...Both: These ETFs Can Help.

I've been investing in the stock market for more than 20 years. Throughout my life as an investor, I don't think I've ever seen a moment when so much seems to be riding on one big question about the markets: Will the artificial intelligence (AI) boom pay off for investors?

Major tech companies are spending hundreds of billions on AI data centers, semiconductors, and other infrastructure to power the advanced AI models they hope will become profitable business tools. If this AI boom thesis proves true, AI might usher in a new era of productivity and higher corporate profits. That would likely be great news for shareholders of major tech stocks in the Nasdaq-100.

But what if it turns out that the AI boom is overhyped and overvalued? What if AI turns out to be another dot-com bubble that bursts, leading to a prolonged bear market for stocks? If the AI bust thesis proves on target, it might make investing in bonds a better choice for the future.

Or what if there's a third answer? What if the future brings both a widespread AI boom and a limited bust that affects some companies, while many other companies find new ways to use AI to become more productive and profitable? In that case, you might want to own a wide range of stocks beyond the major tech companies.

Let's look at a few exchange-traded funds (ETFs) that you might want to consider, based on what you think could happen next with AI.

Image source: Getty Images.

How to invest for an AI boom: Consider tech ETFs and growth ETFs

If you believe that AI is a genuine boom that will pay off with big gains for AI stocks, you might want to buy tech-heavy ETFs. The Invesco Nasdaq 100 ETF (NASDAQ: QQQM) holds 104 stocks representing the entire tech-heavy Nasdaq-100 index. It charges a low expense ratio of 0.15% and has delivered average annual returns (by net asset value) of 14.3% during the past five years.

Another option could be growth stock ETFs, such as the Schwab U.S. Large-Cap Growth ETF (NYSEMKT: SCHG). This is slightly more diversified than the Invesco fund. The Schwab fund holds 196 stocks, and information technology stocks make up about 44.3% of its portfolio. That's less tech-heavy than the Invesco ETF, which consists of about 65.8% tech stocks. Schwab's ETF has delivered average annual returns (by net asset value) of about 13.2% during the past five years.

Want to get even more AI-focused and a bit adventurous? Consider the iShares Future AI & Tech ETF (NYSEMKT: ARTY). This fund holds 49 stocks focused on AI technologies across infrastructure, services, and software. This gives you exposure to the full AI value chain. The fund charges an expense ratio of 0.47% and has delivered average annual returns of about 10% during the past five years.

How to invest for an AI bust: Bond ETFs, international stock ETFs

If you believe that AI won't pay off and that the U.S. stock market is top-heavy with AI stocks and might be ready for a bear market, you might want to buy bond ETFs like the Vanguard Total Bond Market ETF (NASDAQ: BND). Often, when stocks go down, bond prices go up as investors seek the safety of fixed-income investments.

Or consider buying international stocks. Even if the tech-heavy U.S. stock market slumps, the rest of the world economy might outperform in the event of a U.S. AI bust. The Vanguard FTSE All-World ex-US ETF (NYSEMKT: VEU) holds 3,852 global stocks and could help diversify away from the U.S. market. It has delivered average annual returns (by net asset value) of about 17.3% for the past three years and 9.3% for the past five years.

How to invest for both AI boom and bust: Mid-cap and small-cap stock ETFs

What if there is a third way between AI boom and AI bust? If you believe that AI is going to be both a boom (for the economy) and a bust (for some individual tech stocks that might be overvalued), you might want to invest in a way that spreads your bets across other parts of the economy, not just the tech sector and major growth stocks.

This strategy could include buying ETFs that hold the stocks of smaller companies, like the State Street SPDR S&P Midcap 400 ETF Trust (NYSEMKT: MDY). This ETF holds 400 stocks, and with only 14.4% of its portfolio invested in the information technology sector, this mid-cap stock fund is much less tech-heavy than the Nasdaq-100 or S&P 500 (SNPINDEX: ^GSPC). The State Street SPDR S&P Midcap 400 ETF Trust has delivered average annual returns (by net asset value) of about 11.3% for the past 31 years since its inception in May 1995 and about 8.1% during the past five years.

Investing in even smaller companies (small-cap stocks) could also be a good choice if you believe that the future gains of an AI boom will be widely shared, not concentrated in just the major tech names. The Vanguard Russell 2000 ETF (NASDAQ: VTWO) is a low-cost index fund that tracks the Russell 2000 index of small-cap stocks. This fund holds 1,997 small-cap stocks and has delivered average annual returns (by net asset value) of about 7.2% during the past five years.

How to invest during AI uncertainty

Diversification is a good idea anytime, but perhaps especially now during rising doubts about the AI boom. If you believe AI will pay off and that the biggest gains might go to major tech names, then owning tech stock ETFs like the offerings from Invesco, Schwab, or iShares could give you bigger exposure to those AI winners.

But if you're not so convinced that today's AI stock winners will be the same long-term leaders, buying other types of stocks like small caps, mid caps, or international stocks could be a good move. Buying bond ETFs can be a good choice if you want to take some stock market risk out of your portfolio.

Ben Gran has positions in Vanguard Total Bond Market ETF. The Motley Fool has positions in and recommends Vanguard International Equity Index Funds - Vanguard Ftse All-World ex-US ETF and Vanguard Total Bond Market ETF. The Motley Fool has a disclosure policy.