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Nvidia, Microsoft, and Alphabet Are Top Positions in This Magnificent ETF. Here's Why It's a Buy Now.

Motley Fool - Fri Mar 29, 4:56AM CDT

Artificial intelligence (AI) could transform the economy by completing tasks humans can't, and by making existing workers more productive. Goldman Sachs believes the technology will add $7 trillion to the global economy within the next decade, whereas Cathie Wood's Ark Investment Management places that figure at $200 trillion.

Investors are rushing to buy AI stocks like Nvidia, Microsoft, Alphabet, and Amazon, all of which have soared over the past year.

But other AI stocks aren't faring so well. C3.ai stock more than doubled in 2023, but it remains 82% below its all-time high. Similarly, Upstart stock has plunged 93% from its best-ever level. Those cases prove that developing AI alone isn't enough -- companies need to build solid businesses.

Separating the AI winners from the losers won't be easy for investors over the long term, but exchange-traded funds (ETFs) can eliminate that challenge.

A person's hands typing on a keyboard, with a digital rendering of a computer screen popping up.

Image source: Getty Images.

Exchange-traded funds can offer a great risk-reward balance

An ETF can hold dozens or even hundreds of individual stocks, neatly packaged into one security for investors to buy. They offer exposure to specific segments of the market (like AI), and they are usually actively managed, which means a team of professionals will adjust the ETF's portfolio as necessary.

That takes a lot of pressure off individual investors. Plus, since an ETF can hold so many stocks, one bad performer won't lead to catastrophic financial losses.

A number of AI-focused ETFs are available to investors, but the Roundhill Generative AI and Technology ETF(NYSEMKT: CHAT) stands out. It was launched in 2023, and it's already beating the return of the benchmark S&P 500 index. Here's why it's a buy now.

The CHAT ETF holds several popular AI stocks

The CHAT ETF invests in companies developing the platforms, infrastructure, and software required to bring AI to life. The ETF owns 47 different stocks, but its top 10 holdings account for 45.5% of the total value of its portfolio.

That top 10 (and the portfolio as a whole) includes some of the most popular names in the AI space:

Stock

CHAT ETF Portfolio Weighting

1. Nvidia

8.36%

2. Microsoft

7.26%

3. Alphabet (Google)

5.55%

4. Meta Platforms

4.25%

5. Adobe

4.03%

6. Salesforce

3.55%

7. Amazon

3.27%

8. Baidu

3.23%

9. Arista Networks

3.10%

10. ServiceNow

2.92%

Data source: Roundhill Investments. Portfolio weightings as of March 24, 2024 and subject to change.

Nvidia produces the world's most powerful graphics processing units (GPUs) for data center infrastructure, which are designed to handle AI workloads. Its stock soared 239% last year, making it the best performer in the entire S&P 500 index.

Microsoft, Alphabet, and Amazon are home to the world's largest cloud computing platforms, where millions of businesses can access AI models to build their own applications. Adobe is deploying generative AI to make its industry-leading photo and video editing software even more powerful, and Salesforce is using the technology to enhance its customer relationship management software for businesses.

Several familiar names also sit outside of CHAT's top 10 holdings. They include Advanced Micro Devices, which develops AI chips for the data center and for computing purposes, and Oracle, which is a world-class data center operator for AI developers. Palantir Technologies and C3.ai also feature in the ETF.

The CHAT ETF is beating the S&P 500

The CHAT ETF is up 18.9% in 2024 already, crushing the 10.3% return of the S&P 500 index. The ETF launched in May 2023, and it has gained 41.7% since its inception, which trounces the 26.5% return of the S&P 500 over the same period.

It's no surprise, given stocks like Nvidia and Meta Platforms have delivered triple-digit percentage gains over the past 12 months. Stocks like Microsoft, Salesforce, Amazon, AMD, and ServiceNow are all up better than 50% over the past year, too.

Each of the companies in the CHAT ETF operate at the forefront of the AI revolution, and considering the substantial value this technology could create in the coming decade, it should continue to outperform the S&P 500.

However, investors should be mindful of concentration risk. This ETF could plunge if AI fails to live up to the hype because most of the stocks mentioned above would lose a significant portion of their value.

The CHAT ETF is a good option for investors looking for a simple way to own AI stocks as part of a diversified portfolio.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe, Advanced Micro Devices, Alphabet, Amazon, Arista Networks, Baidu, Goldman Sachs Group, Meta Platforms, Microsoft, Nvidia, Oracle, Palantir Technologies, Salesforce, ServiceNow, and Upstart. The Motley Fool recommends 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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