Investing In Artificial Intelligence (AI) Stocks Can Be Risky, But Here's a Fantastic Way to Do It

Artificial intelligence (AI) has taken the stock market by storm this year, and the largest companies in the space are doing incredibly well. Shares of Nvidia and Microsoft, for example, are trading near their best-ever levels. But while many smaller AI stocks have also experienced strong gains in 2023, they are still trading well below their all-time highs:

• C3.ai is up 145% in 2023, but down 83% from its all-time high.
• Upstart is up 71% in 2023, but down 94% from its all-time high.
• Lemonade is up 15% in 2023, but down 90% from its all-time high.

The truth is, investing during the early stages of any technological revolution will always carry risks. It can be difficult to pick winners and losers, especially when nobody really knows how technologies like AI will shape the future over the long-term.

But here's the good news: Investors don't need a crystal ball to capture the upside AI has to offer.

Image source: Getty Images.

Exchange-traded funds might be the best bet

The exchange-traded fund (ETF) is a revolutionary investment vehicle. It will typically own a portfolio of individual stocks designed to give investors exposure to a specific segment of the market (like AI), neatly packaged into one security.

That means investors can buy one or two AI ETFs rather than picking a bunch of individual AI stocks, and they will have a more diverse stake in the industry. While any single AI stock could lose the majority (or all) of its value, an ETF won't face that problem.

Several AI-focused ETFs have hit the market over the last few years, but two really stand out. Here's why investors should consider buying them.

1. iShares Robotics and Artificial Intelligence ETF

The iShares Robotics and Artificial Intelligence Multisector ETF (ARTY -1.28%) holds shares in 112 different companies around the world with varying degrees of exposure to AI, making it one of the most diversified options for investors.

It's also one of the most balanced funds, because its largest holding accounts for just 1.75% of the total value of its portfolio, so its performance isn't beholden to a small number of stocks. Nonetheless, its portfolio features some of the most prominent names in AI:

Data source: iShares. Portfolio weightings as of Nov. 8, 2023 and are subject to change.

But the ETF also owns stakes in dozens of companies using AI to streamline their operations and elevate their customer experience. Social media giant Meta Platforms is one of them, because it uses AI to feed more relevant content to users of Facebook and Instagram. Apple is another; it has developed both AI hardware and software, and it could become a major player in the industry over the long-term.

The iShares ETF has delivered a robust 19.5% return in 2023 so far, and while that isn't as strong as the triple-digit-percentage return of many individual AI stocks, it beats the 14.3% return in the benchmark S&P 500 index. As AI adoption grows among consumers and businesses, there is a great chance the ETF will continue to outperform.

2. Global X Artificial Intelligence and Technology ETF

The Global X Artificial Intelligence and Technology ETF (AIQ -1.30%) is a bit more concentrated than the iShares ETF, because it only holds 87 individual stocks. The composition of its portfolio is also heavily weighted to some of the largest names in the AI industry. In fact, the ETF's top 10 holdings account for a whopping 33.1% of the total value of its portfolio:

Data source: Global X ETFs. Portfolio weightings as of Nov. 8, 2023 and are subject to change.

That high level of concentration is a double-edged sword. On one hand, a high degree of exposure to top-performing stocks like Amazon, Meta Platforms, Microsoft, and Nvidia is the reason the Global X ETF has delivered a powerful 39% return in 2023 so far. That is more than double the return of the iShares ETF.

On the other hand, if those stocks cool off for a period of time, it could drag down the performance of the entire ETF.

The Global X ETF is also slightly more expensive to own, with a 0.68% expense ratio, compared to 0.47% for the iShares ETF. That represents the percentage of the fund's value that is deducted each year to cover costs like staffing, marketing, and regulatory fees.

In any case, the return of the Global X Artificial Intelligence & Technology ETF speaks for itself, and if the current leaders in the AI space remain at the top, then it will continue to perform extremely well. For investors with a higher risk appetite, this is the ETF to own.