Investors looking to gain exposure to the artificial intelligence sector through exchange-traded funds (ETFs) have several options, each with distinct strategies and risk profiles. While individual tech stocks can experience significant volatility, ETFs provide diversification that may help manage risk. This analysis examines three funds: the Invesco S&P 500 Top 50 ETF (XLG), the iShares A.I. Innovation and Tech Active ETF (BAI), and the Global X Artificial Intelligence & Technology ETF (AIQ).
Key Takeaways
- ETFs can offer a diversified way to invest in the volatile artificial intelligence sector, mitigating some risks associated with individual stocks.
- The Invesco S&P 500 Top 50 ETF (XLG) concentrates on the largest U.S. companies, making it a bet on established market leaders.
- The iShares A.I. Innovation and Tech Active ETF (BAI) uses an actively managed, conviction-based strategy that is not weighted by market cap.
- The Global X Artificial Intelligence & Technology ETF (AIQ) provides global diversification, with significant holdings in non-U.S. companies.
Navigating Volatility in Technology Investing
Achieving substantial returns from stock market investments often requires holding assets through periods of significant price fluctuation. The technology sector, in particular, is known for its volatility. Even today's leading companies have faced severe downturns in their history.
In 2022, for example, prominent companies like Nvidia, Meta Platforms, Amazon, Alphabet, and Tesla all experienced stock price declines of over 40% from their previous all-time highs. However, their subsequent performance highlights the potential for recovery and growth in the sector. Since the start of 2023, Nvidia's stock has increased by more than 1,100%, while Meta has seen a rise of over 500%.
For many investors, holding individual stocks through such steep declines can be challenging. Exchange-traded funds (ETFs) offer an alternative by bundling multiple stocks into a single investment, which spreads risk across a wider range of companies.
Why Diversification Matters
Diversification is a core investment principle that involves spreading investments across various assets to reduce risk. In a volatile sector like AI, an ETF can help cushion the impact if one or two companies in the fund underperform, as the performance of other holdings may compensate for the losses.
Invesco S&P 500 Top 50 ETF (XLG): A Focus on Giants
The Invesco S&P 500 Top 50 ETF (XLG) offers a straightforward strategy for investors who believe the largest and most established companies will continue to dominate the market and lead AI development. This fund invests exclusively in the top 50 companies within the S&P 500, ranked by market capitalization.
This approach results in a highly concentrated portfolio. A significant portion of the fund, approximately 62%, is allocated to just ten companies often referred to as the "Ten Titans." These include technology leaders such as Nvidia, Microsoft, Apple, Alphabet, and Amazon.
Portfolio Concentration
The concentration in XLG is notably higher than in the broader S&P 500 index. While the Ten Titans make up around 39% of the S&P 500, their weighting in this ETF is substantially greater. This makes the fund a targeted bet on the continued success of these specific market leaders.
Investors considering this ETF should be comfortable with a portfolio heavily influenced by a small number of large-cap tech stocks. The fund's performance will be closely tied to the fortunes of these dominant firms.
XLG Fund Details
- Strategy: Invests in the top 10% of S&P 500 companies by market cap.
- Concentration: Approximately 62% of assets are in ten major technology companies.
- Expense Ratio: 0.20%, which is considered reasonable for this type of focused strategy.
iShares A.I. Innovation and Tech Active ETF (BAI): An Actively Managed Fund
For those seeking a different approach, the iShares A.I. Innovation and Tech Active ETF (BAI) is an actively managed fund. Unlike passively managed, market-cap-weighted ETFs, the holdings and their weights in BAI are determined by the fund's managers based on their research and conviction.
This active management means the portfolio can look very different from a standard index. For example, Oracle has a 5% weighting, which is nearly as high as Microsoft's 5.7% allocation. Broadcom is weighted at 8.4%, just behind Nvidia at 9.2%. This reflects the managers' belief in the potential of these specific companies within the AI space.
Considerations for an Active Fund
Active management comes with a higher cost. BAI has a net expense ratio of 0.55%, which is significantly more than many passive index funds. The fund is also relatively new, having launched in October 2024. Potential investors should carefully review its holdings and understand the strategy employed by its managers before investing.
The success of this ETF depends heavily on the ability of its managers to select companies that will outperform the broader market. It is designed for investors who trust in an expert-led, research-driven approach to stock selection.
Global X Artificial Intelligence & Technology ETF (AIQ): A Global and Diversified Option
The Global X Artificial Intelligence & Technology ETF (AIQ) is designed for investors who want a broader, more globally diversified exposure to the AI theme. A key feature of this fund is its significant investment in international companies.
Approximately 31% of the ETF's portfolio is invested in non-U.S. firms. This includes major international technology companies that are not part of the S&P 500. Top-10 holdings include Alibaba Group, Samsung Electronics, Tencent, and Taiwan Semiconductor Manufacturing Company.
A Different Approach to Weighting
Another distinguishing characteristic of AIQ is its diversified weighting. Unlike many other tech-focused funds, it is not top-heavy. No single company makes up more than 4% of the fund's holdings. This contrasts sharply with funds like BAI, where the top five stocks account for over a third of the portfolio.
AIQ Fund Details
- Strategy: An "unconstrained approach" targeting innovative AI and tech companies globally.
- Global Exposure: Around 31% of holdings are in non-U.S. companies.
- Diversification: No single holding exceeds 4% of the portfolio.
- Expense Ratio: 0.68%.
This structure makes AIQ suitable for investors seeking to avoid over-concentration in a few U.S. tech giants and to capture AI-related growth from companies around the world. Its higher expense ratio of 0.68% reflects its global scope and thematic focus.
Understanding the Risks and Long-Term Outlook
While these ETFs offer different ways to invest in AI, they all carry risks associated with the technology sector. High valuations are common, and companies are under pressure to translate significant capital expenditures on infrastructure, like data centers, into profitable returns.
The AI industry is still in its early stages of build-out. Future growth depends on widespread adoption and usage of AI models by businesses and consumers. Developments like agentic AI, which helps with task completion, and edge AI, which runs on devices instead of the cloud, represent potential avenues for growth.
Potential Headwinds for the AI Sector
Several factors could negatively impact AI-focused investments. A broader economic downturn could challenge the high valuations of many tech companies. A pullback in capital spending by corporations after the initial investment phase could also slow growth. Investors should be prepared for potential volatility.
Ultimately, these AI-focused ETFs are best suited for investors with a high tolerance for risk and a long-term investment horizon. Before investing, individuals should assess whether the strategy of a particular fund aligns with their personal financial goals and existing portfolio composition.
