Artificial intelligence (AI) was the dominant theme in the stock market in 2024. There was standout performance from select AI chip stocks, AI software stocks, and even energy stocks, as power-hungry data centers drove demand for electricity.
But picking winners and losers won’t be easy. Advanced micro devices The stock is up 50% during the first few months of 2024, yet it’s on track to close out the year under By 10%. This sequence of events would have been impossible to predict 12 months ago, especially since AMD is now a leading supplier of AI chips.
As a result, most investors may be better off buying AI-focused exchange-traded funds (ETFs), which can provide diversified exposure to this technology revolution.
However, investors should look for AI-backed ETFs with diversified industry exposure. In other words, good ETFs will hold shares in AI hardware companies e.g Nvidiasuch as artificial intelligence software companies Microsoftand even companies deploying AI in their legacy businesses, e.g Meta platforms or Service now.
Although AI is likely to create a great deal of value, previous technological breakthroughs (such as the Internet) have taught us that volatility is part of the journey – some companies will do well, while others will fail completely. By owning a slice of each AI sector, investors can maximize their chances of generating positive returns on a consistent basis.
This is an ideal AI fund, because its sole purpose is to invest in companies that are developing the infrastructure, platforms, and software that drive the AI revolution forward.
The ETF has only 50 stocks, which is relatively heavy because its five largest positions alone represent 26.6% of the total value of its portfolio:
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stock
|
Roundhill ETF Portfolio Weighting
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1. Nvidia
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7.69%
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2. alphabet
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5.75%
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3. Microsoft
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5.34%
|
|
4. Meta platforms
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4.16%
|
|
5. Taiwan Semiconductor Manufacturing Co., Ltd
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3.67%
|
Data source: Roundhill Investments. Portfolio weights are accurate as of December 23, 2024, and are subject to change.
This group of five stocks is diversifying on its own. Nvidia and Taiwan Semi cover the hardware side of AI, Alphabet and Microsoft are betting big on AI software, and Meta is integrating AI into its social networks Facebook and Instagram.
Aside from the top five, the Roundhill ETF holds several other popular AI stocks such as Palantir Technologies, oracleand apple. It also has small positions in Vistra energy and Energy constellationwhich has struck major deals with technology companies to power its AI data centers.
The fund was only created in 2023, so it doesn’t have a very long track record for investors to analyze. However, it has a massive 38% return in 2024, crushing both… Standard & Poor’s 500Which increased by 24%, and Nasdaq-100which increased by 31%.
The ETF has an expense ratio of 0.75%, which is the percentage the fund deducts each year to cover management costs. This is relatively high, even for a very specialized fund. Most low-cost ETFs issued by Vanguard have expense ratios of less than 0.1%, and even the iShares ETF (which I’m about to discuss) has an expense ratio of just 0.47%.
This may be the only drawback to owning the Roundhill ETF. However, it has certainly made up for its high cost in 2024 with its impressive yield, and this could be the case again in 2025 if AI stocks continue to rise.
The iShares ETF was created in 2018 with a focus on robotics and artificial intelligence, but changed its name and purpose in August 2024. It now aims to invest in the entire value chain of companies in the AI race, including those building AI infrastructure, AI development Generative Artificial Intelligence, AI service delivery, and more.
Like the Roundhill ETF, this fund also holds only 50 stocks. The top five represent 23.4% of the total value of its portfolio, and each operates in the AI hardware sector:
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stock
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iShares ETF Portfolio Weighting
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1. Broadcom
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5.69%
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2. Arista Networks
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4.73%
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3. Nvidia
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4.50%
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4. Advanced micro-instrumentation
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4.29%
|
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5. Vertif Holdings
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4.19%
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Data source: iShares. Portfolio weights are accurate as of December 23, 2024, and are subject to change.
Broadcom and Arista Networks provide networking equipment for data centers, helping operators 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 over the next few years as more AI workloads are processed on-device.
The iShares ETF is a little more diversified when you look beyond the top five. It owns a stake in many popular AI companies such as Palantir, AmazonAlphabet, Microsoft, and Meta platforms.
Since the iShares ETF only restructured its portfolio on August 12 of this year, its performance history is very short. However, it has risen 24% since then, which is nearly double the gains made by the S&P 500 over the same time frame. However, a four-month period is not long enough to draw any real conclusions.
However, this looks like a great ETF to buy for 2025 based on the quality of its portfolio – 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. Susan Frey, an executive 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 Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Anthony Di Bizzio He has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends 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 $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has Disclosure policy.
2 Artificial Intelligence (AI) ETFs to Buy with Confidence Heading into 2025 Originally published by The Motley Fool
