Demand for artificial intelligence (AI) products is expected to skyrocket in the coming years. Grand View Research predicts that annual spending across AI hardware, software and services will jump 820% from $197 billion in 2023 to $1.8 trillion in 2030. Masu. This represents 37% annual growth over that period.
Investors can take advantage of that opportunity by buying individual AI stocks. However, that strategy requires considerable effort. Investors should thoroughly research the underlying business before purchasing stocks. Additionally, investors should continue to monitor all the companies they own over time to ensure their investment thesis remains prudent.
Alternatively, investors can buy AI index funds. This is a strategy that requires much less effort. Index funds are ready-made portfolios that spread your capital across a variety of companies. Although it simplifies the task, investors still need to research the index funds they want to own to ensure capital is distributed to the right companies at the right prices.
To help you with that research, here’s one AI index fund worth buying and three you should avoid.
One artificial intelligence index fund you can definitely buy
When investors think about artificial intelligence (AI), I ask the following questions: S&P500 The first thing that comes to mind is index funds.but Vanguard S&P 500 ETF (VOO 0.57%) With a more favorable risk-reward profile than most index funds, it’s a great way to take advantage of the growing demand for AI.
how S&P500 Does it have something to do with AI? A total of 152 S&P 500 companies discussed AI during their third-quarter earnings calls, according to FactSet. While not all companies will use AI in a way that creates value for shareholders, some will definitely monetize the technology to great effect.
Consider the Vanguard S&P 500 ETF’s five largest holdings and their percentages of the total fund.
- apple: 7%
- microsoft: 7%
- alphabet:3.8%
- Amazon:3.4%
- Nvidia:3%
Four of these five companies are very well positioned to monetize AI. Amazon, Microsoft, and Alphabet are the world’s largest cloud service providers. So all three should benefit businesses as they provision cloud infrastructure to develop AI applications. Additionally, all three companies are introducing generative AI assistants that expand their ability to monetize AI.
Similarly, Nvidia’s graphics processing units (GPUs) are the gold standard for machine learning. The company also expanded its ability to monetize AI by expanding into data center networking equipment, central processing units (CPUs), subscription software, and cloud services. All of these are purpose-built for AI.
Another reason the Vanguard S&P 500 ETF is an attractive investment is that very few index funds outperform their benchmarks over time. In fact, over the past three years he has outperformed the S&P 500 by only 20% of large-cap funds, and over the past five years only 13%. S&P Global.
Finally, the S&P 500 has become a surefire way to make money for patient investors. The index has historically produced positive returns in every 20-year cycle and has never failed to recover from a correction, bear market, or recession. Additionally, the S&P 500 has returned 241% over the past 10 years, compounding at an annual rate of 13%. At this rate, a $100 weekly investment in the Vanguard S&P 500 ETF will grow to more than $100,000.
3 expensive AI-related index funds to avoid
When choosing an index fund, investors should ask themselves two questions. First, does the index fund in question consistently outperform the S&P 500? If the answer is no, think twice about buying it. There is almost no point in settling for poor performance.
Second, are the index funds in question expensive? The Vanguard S&P 500 ETF has a very low expense ratio of 0.03%, meaning investors will pay just $3 in fees per year for a $10,000 portfolio . Unless the index fund has spectacularly outperformed the S&P 500 in the past, it would be foolish to pay more.
With this in mind, investors should avoid the following index funds:
of Global X Robotics & Artificial Intelligence ETF (Bots 1.84%) Measures the performance of 42 stocks.His two largest holdings in the company are Nvidia and intuitive surgery, accounting for 20% of the weight. Index funds have underperformed the S&P 500 over the past one, three, and five years. He also has an above-average expense ratio of 0.69%.
of Ark Autonomous Technology & Robotics ETF (ARKQ 1.89%) Measure the performance of 36 stocks. Its two largest holdings, tesla and UiPath, accounting for 20% of the weight. Index funds have underperformed the S&P 500 over the past one, three, and five years. He also has an above-average expense ratio of 0.75%.
of iShares Robotics and Artificial Intelligence Multi-Sector ETF (IRBO 1.20%) Measure the performance of 111 stocks.His two largest holdings in the company are Nvidia and meta platform, accounting for only 3% of the weight. However, index funds have still underperformed the S&P 500 over the past one, three, and five years. He also has an above-average expense ratio of 0.47%.
Investors can buy S&P 500 index funds and individual AI stocks
Investors don’t have to choose between holding only index funds or individual stocks. Mixed strategies are perfectly acceptable. In other words, investors can split their money between an S&P 500 index fund and a select group of AI stocks. This strategy is attractive because it not only leaves room for outperformance but also limits the downside.
Specifically, investors will outperform the S&P 500 if individual stocks outperform. But if they allocate enough money to an S&P 500 index fund, their portfolio won’t fare too badly even if stocks underperform. The S&P 500 returned 13% annually over the past 10 years. It has also returned 10% annually over the past 30 years.
Personally, I prefer a blended approach. You can take on a little extra risk by buying individual stocks, but I balance that risk with the Vanguard S&P 500 ETF.
Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool’s board of directors. John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon, Nvidia, Tesla, UiPath, and Vanguard S&P 500 ETFs. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Intuitive Surgical, Meta Platforms, Microsoft, Nvidia, S&P Global, Tesla, UiPath, and Vanguard S&P 500 ETFs. The Motley Fool has a disclosure policy.
