The S&P 500 delivered back-to-back annual total returns of over 25% in 2023 and 2024. The only other time that happened in the history of the index (dating back to 1957) was in 1997 and 1998, during the dot-com internet boom.
The technology sector drove the S&P higher on that occasion too, but the catalyst is artificial intelligence (AI) this time. Some of the world's largest companies are leading the charge. Nvidia stock, for example, has soared over 840% since the beginning of 2023, catapulting the company's value to $3.4 trillion as of this writing.
But the dot-com bubble taught investors that picking winners and losers in an emerging industry can be extremely difficult. That era generated incredible success stories like Amazon, but thousands of other companies failed. The AI boom could produce a similar outcome in the long run.
That's why buying an exchange-traded fund (ETF) that holds a portfolio of AI stocks could be the smartest way to play this tech revolution. Investors can buy a single share of the Roundhill Generative AI and Technology ETF(NYSEMKT: CHAT) for less than $50. Here's why it's worth considering.
Image source: Getty Images.
Nvidia, Alphabet, and Microsoft are among the top holdings in this ETF
ETFs can hold hundreds or even thousands of individual stocks, but the Roundhill ETF only holds 50. That means it's relatively concentrated, which can be a recipe for volatility, so it's mainly suitable for investors who already have a diversified portfolio of other ETFs and/or stocks.
The Roundhill ETF specifically invests in companies developing the platforms, infrastructure, and software that bring AI to life. Since this technology is still in the early stages, the list of names in those categories isn't very long just yet.
With that said, the top five holdings in the ETF include a star-studded lineup of AI leaders:
Stock
RoundHill ETF Portfolio Weighting
1. Nvidia
7.32%
2. Alphabet
5.67%
3. Microsoft
5.18%
4. Meta Platforms
4.22%
5. Taiwan Semiconductor Manufacturing
3.65%
Data source: Roundhill Investments. Portfolio weightings are accurate as of Jan. 16, 2025, and are subject to change.
Nvidia is the top supplier of graphics processors (GPUs) for AI data centers. Those chips have driven its growth over the last couple of years and will continue doing so going forward, but the company is now eyeing new multitrillion-dollar opportunities in areas like autonomous vehicles and robotics. Therefore, this stock certainly deserves its spot at the top of the Roundhill ETF.
Alphabet and Microsoft are also major players in the AI space, having developed their own chatbots and virtual assistants. Their cloud platforms also offer state-of-the-art computing capacity (powered by Nvidia's chips) and ready-made large language models (LLMs), which businesses can rent to develop their own AI applications.
Outside of the Roundhill ETF's top five positions, it holds several other leading AI stocks like Broadcom, Oracle, Palantir Technologies, Amazon, and Advanced Micro Devices.
The Roundhill ETF beat the S&P 500 last year
The Roundhill ETF was established in May 2023, so it doesn't have a very long track record for investors to analyze. However, it delivered a return of 31% in 2024, which comfortably beat the S&P 500 (even after accounting for the ETF's 0.75% expense ratio). The strong result was partly attributable to the average gain of 74% for the ETF's top five holdings:
As I mentioned earlier, this ETF is too concentrated to serve as a complete portfolio on its own, and investors should always avoid putting all of their eggs in one basket. But it could help elevate the returns of a diversified portfolio, especially if AI stocks continue to lead the market higher.
Had you invested $10,000 in the S&P 500 at the start of 2024, you would have ended the year with $12,502 (including dividends). But if you split that investment with 70% in the S&P 500 and 30% in the Roundhill ETF, your $10,000 would be worth $12,680 instead.
That doesn't sound like a huge difference in the short term, but the magic of compounding could lead to significant outperformance over the long run. Of course, AI will have to live up to its high expectations for the ETF to continue generating market-beating gains.
Citing a forecast from Goldman Sachs, Roundhill thinks AI could add a whopping $7 trillion to the global economy by 2032. Hardware suppliers like Nvidia, Taiwan Semiconductor, and Broadcom will benefit because developing AI isn't possible without their chips and components. But a lot of the value will also come from the software side thanks to companies like Microsoft, Alphabet, Amazon, Palantir, and more.
Therefore, the Roundhill ETF looks like a no-brainer for investors who don't already have much exposure to the AI revolution.
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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. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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 Advanced Micro Devices, Alphabet, Amazon, Goldman Sachs Group, Meta Platforms, Microsoft, Nvidia, Oracle, Palantir Technologies, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom 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.
