Investing in Artificial Intelligence (AI) Stocks Can be Risky, but This Might be a Great Way to Do It

OpenAI's ChatGPT application launched in November 2022 and amassed 100 million users within just a couple of months, marking the beginning of the artificial intelligence (AI) boom.

Since then, many stocks in the semiconductor, cloud computing, and even software industries have delivered blistering returns, leading the broader market higher.

But volatility is on the rise as investors question the sustainability of the AI infrastructure spending boom. Practically every stock in the AI sphere is pulling back, including some of the highest-quality names:

• Nvidia stock is down 10% from its all-time high (as of the market close last Friday, Oct. 16).
• Alphabet stock is down 15% from its high.
• Advanced Micro Devices stock is down 18% from its high.
• Micron Technology stock is down 28% from its high.
• SanDisk Corp is down 44% from its high.

Corrections are a normal part of the investing journey, but investors who want to limit their exposure to extreme volatility might want to consider buying an exchange-traded fund (ETF) like the iShares Future AI and Tech ETF (NYSEMKT: ARTY). It holds a portfolio of 50 leading AI stocks, so it saves investors from having to pick winners and losers. Read on.

Image source: Getty Images.

A diverse portfolio of AI stocks

The iShares Future AI and Tech ETF aims to give investors exposure to the entire AI value chain, which includes infrastructure, software, and services. Below are a couple of its most noteworthy holdings from each of those categories.

Infrastructure

• Nvidia supplies the world's best graphics processing units (GPUs) for data centers, which are the primary chips used in AI training and inference workloads. It just started shipping its new Vera Rubin systems which will be used by every major AI lab, including OpenAI and Anthropic.
• Advanced Micro Devices has become one of Nvidia's top competitors in the market for data center GPUs, but it's also a leader in the personal computing segment of the AI industry thanks to its Ryzen AI processors for desktops and laptops.

Software

• Microsoft created the Copilot virtual assistant, which is now embedded in legacy software products like Windows, Edge, and the 365 productivity suite (Word, Excel, and Outlook), where it can accelerate workflows and answer questions on a range of topics.
• Palantir Technologies developed a suite of software products designed to help private enterprises and government organizations use AI to extract maximum value from their data.

Services

• Accenture is a global consulting firm that is helping companies restructure their business models and critical workflows around AI to maximize efficiency. It works from the ground up by helping its clients design the necessary data and governance architectures to deploy AI successfully.
• Snowflake offers a growing portfolio of cloud services that help businesses harness their valuable internal data and turn it into powerful AI software.

Some of the other noteworthy AI stocks in the iShares ETF include Taiwan Semiconductor Manufacturing, Broadcom, Micron Technology, and Space Exploration Technologies.

The iShares ETF is beating the market right now

The iShares Future AI and Tech ETF was originally created in 2018 with a focus on AI and robotics, but it was restructured in August 2024 to narrow its mandate to AI alone. As a result, it doesn't have a very long track record of performance for investors to analyze.

Nevertheless, the ETF has soared by a whopping 130% since the restructure, crushing the S&P 500 which has returned 44% over the same period.

However, investors should never park all of their money into an ETF that only focuses on one area of the stock market. Concerns are mounting about the sustainability of the AI spending boom as funding gets harder to come by, particularly at favorable terms. Even the best companies are feeling the effects, with Anthropic now expected to go public at a valuation of $1.5 trillion, down from initial expectations of $2 trillion. If these challenges persist, the iShares ETF could suffer a sharp correction.

Cost is another consideration. The iShares ETF has an expense ratio of 0.47%, which translates to an annual fee of $47 for every $10,000 invested. That doesn't sound like much at face value, but it's roughly 15 times more than an investor would pay in a passive index fund offered by Vanguard, for example, which can cost as little as 0.03% per year.

The iShares ETF's higher fees relate to its actively managed portfolio. Rather than simply tracking an index, a team of professionals will regularly buy and sell stocks based on what they believe will deliver the best returns. This can yield great results, but it also costs more money.

In summary, the iShares Future AI and Tech ETF might be the perfect addition to a diversified portfolio that doesn't already have much exposure to the AI industry, but it definitely shouldn't be an investor's only position.

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Accenture Plc, Advanced Micro Devices, Alphabet, Broadcom, Micron Technology, Microsoft, Nvidia, Palantir Technologies, Snowflake, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2028 $260 calls on Accenture Plc and short January 2028 $280 calls on Accenture Plc. The Motley Fool has a disclosure policy.