2 artificial intelligence (AI) ETFs to buy with the S&P 500 at a record high

It’s not too late to stock up on these unstoppable artificial intelligence (AI) ETFs, even with the stock market at an all-time high.

The reference S&P500 The index is on a roaring uptrend, continuing to set new records. It is weighted by market capitalization, which means a mere handful of major technology stocks can strongly influence its performance, and they are responsible for a significant portion of its gains over the past year.

Nvidia is one of these stocks. It has reached a market capitalization of $3 trillion, making it the second largest company in the world. It was only worth $360 billion at the start of 2023!

Artificial intelligence (AI) is responsible for most of Nvidia’s incredible value creation, but it is not the only value to benefit from this technological revolution. Two exchange-traded funds (ETFs) hold some of the top AI stocks that will likely continue to propel the S&P 500 higher.

Here’s why investors might want to buy the Roundhill Generative AI and Technology ETF (CAT -0.59%) and the iShares ETF for the broad technology sector (IGM -0.14%).

1. Roundhill Generative AI and Technology ETF (CHAT)

Roundhill believes Generative AI will lead to a wave of productivity throughout the economy. Apps like ChatGPT have proven their ability to quickly create text, images, video and computer code on command, already accelerating workloads across dozens of industries.

THE ETFs has stakes in 53 companies that develop AI hardware and software, or stand to benefit from using the technology in their existing businesses. The ETF is heavily weighted toward its top 10 holdings, which represent 53.5% of its total portfolio value, and the list includes most of the top holdings. AI stocks that investors will want to own:

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Roundhill Generative AI and Technology ETF Portfolio Weighting

Data source: Roundhill. Portfolio weightings are accurate as of June 5, 2024 and are subject to change.

The development of advanced AI models would not be possible without Nvidia’s graphics chips (GPUs) for the data center. Demand is off the charts, driving the company’s data center revenue 427% year-over-year to $22.6 billion in the first quarter of fiscal 2025 (ended April 28) . This momentum is expected to continue in the short term.

Advanced Micro Devices recently launched a competing line of GPUsand the chipmaker has also taken a lead in the AI-powered personal computer market.

MicrosoftAlphabet and Amazon are home to three of the largest companies cloud computing platforms. They each spend billions of dollars buying GPUs from Nvidia and AMD, and rent that computing power to their customers, who use it to develop AI.

Outside of its top 10, the fund holds smaller positions in other popular AI stocks, including C3.ai, Micron technologyAnd Palantir Technologies.

The ETF was only created in May 2023, but it has already returned 40%, dwarfing the S&P 500’s 27% gain over the same period. Investors will, however, pay a premium for these returns. Roundhill’s AI and generative technology has a spending rate of 0.75%, i.e. the proportion of the fund withdrawn each year to cover management costs. It’s the upper end of the industry — some ETFs have expense ratios as low as 0.1%.

That said, Roundhill Generative AI and Technology is a great option for investors looking for long-term exposure to the AI ​​boom. However, they should be aware that if AI fails to live up to the hype, this ETF is likely to underperform.

2. iShares Broad Technology Sector ETF (IGM)

The iShares Expanded Tech Sector ETF is more diversified than the Roundhill fund. Its goal is to invest in technology hardware, software, interactive media, Internet marketing and related companies, so that it is not beholden to the success of AI alone.

The ETF holds 278 stocks, but its top 10 holdings represent 57.8% of its total portfolio value, so there is still some concentration risk. Its top 10 includes many companies leading the AI ​​race, as these companies also dominate other segments such as consumer devices, consumer software, social media, and more. :

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iShares Broader Technology Sector ETF Portfolio Weighting

Data source: iShares. Portfolio weightings are accurate as of June 5, 2024 and are subject to change.

The ETF benefits from good exposure to AI chip leaders thanks to Nvidia and advanced micro-devices. But it also has a large position in Apple, which has more than 2.2 billion active devices worldwide, led by the flagship iPhone. This huge installed base could soon make Apple the largest AI software distributorbecause it negotiates with OpenAI and Alphabet to integrate their chatbots into its devices, which is expected to create exciting new experiences for customers.

Meta-platforms are increasingly using AI-based algorithms to recommend content on Facebook and Instagram, boosting engagement and increasing ad revenue. The company also developed the world’s most popular open source software. large language model (LLM) called Llama, which is the basis of a new AI features like Meta AI chatbot.

In addition to its top 10 holdings, iShares Expanded Tech Sector also owns the top cybersecurity stocks. Palo Alto Networks And Crowd strikein addition to cloud stocks like Snowflake And Data Dog. These companies also use AI, but they can rely on very successful companies if their latest experiments fail.

The ETF was established in 2001 and has since generated a compound annual return of 10.6%. That’s better than the S&P 500’s average annual return of 7.9% over the same period. However, the proliferation of technologies like smartphones and cloud computing has propelled the fund to an even better compound annual gain of 19.7% over the past 10 years.

iShares Expanded Tech Sector has an expense ratio of 0.41%, so it is cheaper to own than the Roundhill ETF. Simply put, if AI continues to create significant value, iShares’ expanded technology sector will continue to generate strong returns. But if AI doesn’t live up to its potential, this ETF contains hundreds of stocks that should do just fine.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Anthony DiPizio has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Adobe, Advanced Micro Devices, Alphabet, Amazon, Apple, CrowdStrike, Datadog, Meta Platforms, Microsoft, Netflix, Nvidia, Oracle, Palantir Technologies, Palo Alto Networks, Qualcomm, ServiceNow and Snowflake. The Motley Fool recommends Broadcom and C3.ai and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

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