The AI boom is likely to produce many winners and losers, and here's how I would set up my portfolio for success.
If you follow the stock market for any length of time, you know that artificial intelligence (AI) is one of the most exciting trends right now. Many of the top AI stocks, including Nvidia, AMD, and Alphabet, have fallen significantly from their recent highs, so for those who missed out on the initial boom, now may be a great time to invest in AI.
I don't have much exposure to AI in my portfolio. I do have some stocks in companies that should benefit from AI in some way, but I don't own any chipmakers, AI software companies, or other companies that I consider directly related to AI.
The biggest reason is that AI stocks are not my specialty. I consider myself good at analyzing and valuing bank and real estate stocks, so I have a large portion of my portfolio in those stocks. But I also want exposure to AI, and I'm going to get it through exchange-traded funds (ETFs). In the next few weeks, I'll be opening small positions in two AI-focused ETFs. One is a passive index fund and the other is actively managed.
AI index fund
The first of the two is the iShares Future AI & Tech ETF (ARTY 0.15%). This is an ETF designed to track an index of companies that directly contribute to generative AI, AI data, AI infrastructure, or AI software and services. It has an expense ratio of 0.47%, which is higher than many index funds but reasonable for something so specialized.
According to the latest information, this ETF holds 49 stocks in its portfolio, and the top stocks probably won't be a big surprise: the top three are Broadcom, Nvidia, and AMD. No stock makes up more than 6% of the portfolio, so this is a fairly diversified index fund.
While it's a relatively small index fund with net assets of around $600 million, it's a solid fund focused on AI technology with a significantly lower expense ratio than most comparable ETFs.
Curated AI Portfolio
Another AI-focused ETF I'm watching is the Ark Autonomous Technology and Robotics ETF (ARKQ 1.38%), managed by Cathie Wood's Ark Invest.
The ETF has just under $800 million in net assets and, as mentioned above, is an actively managed fund, meaning Wood and his team hand-select stocks that they expect to outperform the relevant benchmark. Because it's actively managed, the expense ratio is a little on the higher side (0.75%), but it's reasonable for such a specialized, actively managed fund.
Now, this isn't an AI-specific ETF: it invests in a variety of technologies, most of which should benefit from advances in AI: robotics, intelligent devices, autonomous vehicles, and next-generation cloud computing, to name just a few.
The fund is fairly concentrated, with its top three holdings (Tesla, Teradyne, and Kratos Defense & Security) accounting for roughly 32% of assets. In short, I favor the iShares ETF for building a broad portfolio of AI stocks, and the Ark ETF for investing in companies that will benefit most from advances in AI.
I'll try a bite first.
To be clear, these will be relatively small positions in my portfolio — at least at first. I still view many AI stocks as a bit pricey, so I view these as long-term investments and will gradually build my position over time. That way, I'll have some exposure right away, but if the market starts to sell off again, I can take advantage and add shares at cheaper prices.
Suzanne Frey, an executive at Alphabet, serves on The Motley Fool's board of directors. Matt Frankel has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Advanced Micro Devices, Alphabet, Nvidia, and Tesla. The Motley Fool recommends Broadcom and Teradyne. The Motley Fool has a disclosure policy.
