Artificial intelligence (AI) was the dominant theme in the stock market in 2024. There were standout performances from select AI chip stocks, AI software stocks, and even energy stocks, as power-hungry data centers sent electricity demand soaring.
According to Morgan Stanley, four of the world's largest technology companies alone could spend a combined $300 billion to develop AI next year. As a result, it is likely to remain the leading story in the stock market throughout 2025.
But picking the individual winners and losers won't be easy. Advanced Micro Devices stock was up by 50% within the first few months of 2024, yet it's on track to end the year down by 10%. Predicting that sequence of events would have been impossible 12 months ago, especially because AMD is now a leading supplier of AI chips.
As a result, most investors might be better off buying AI-focused exchange-traded funds (ETFs) instead, which can offer diversified exposure to this technological revolution.
Image source: Getty Images.
What to look for in an AI ETF
It's common for ETFs to hold hundreds or even thousands of individual stocks, but since the AI industry is still in its very early stages, most ETFs in this space only hold a few dozen names. As a result, they are highly concentrated, and investors should only buy them as part of a balanced portfolio of other funds and individual stocks.
With that said, investors should look for AI ETFs with diverse exposure to the industry. In other words, a good ETF will hold shares in AI hardware companies like Nvidia, AI software companies like Microsoft, and even companies deploying AI into their legacy businesses, like Meta Platforms or ServiceNow.
Even though AI is likely to create a significant amount of value, past tech booms (like the internet) have taught us that volatility is part of the journey -- some companies will hit home runs, whereas others will fail completely. By owning a slice of every AI segment, investors can maximize their chances of generating positive returns on a consistent basis.
Here's why the Roundhill Generative AI and Technology ETF(NYSEMKT: CHAT) and the iShares Future AI and Technology ETF(NYSEMKT: ARTY) might be two of the best AI ETFs investors can take into the new year.
1. Roundhill Generative AI and Technology ETF
This is a quintessential AI fund, because its sole objective is to invest in companies developing the infrastructure, platforms, and software driving the AI revolution forward.
The ETF only holds 50 stocks, and it's relatively top-heavy because its five largest positions alone account for 26.6% of the total value of its portfolio:
Stock
Roundhill ETF Portfolio Weighting
1. Nvidia
7.69%
2. Alphabet
5.75%
3. Microsoft
5.34%
4. Meta Platforms
4.16%
5. Taiwan Semiconductor Manufacturing
3.67%
Data source: Roundhill Investments. Portfolio weightings are accurate as of Dec. 23, 2024, and are subject to change.
That group of five stocks is diversified on its own. Nvidia and Taiwan Semi cover the AI hardware side, Alphabet and Microsoft are betting big on AI software, and Meta is integrating AI into its Facebook and Instagram social networks.
Outside of its top five positions, the Roundhill ETF owns several other popular AI stocks like Palantir Technologies, Oracle, and Apple. It also has small positions in Vistra Energy and Constellation Energy, which have cut major deals with tech companies to supply electricity for their AI data centers.
The fund was only established in 2023, so it doesn't have a very long track record for investors to analyze. However, it has generated a whopping 38% return in 2024, crushing both the S&P 500, which is up 24%, and the Nasdaq-100, which is up 31%.
The ETF has an expense ratio of 0.75%, which is the proportion of the fund deducted each year to cover management costs. That's relatively high, even for a very specialized fund. Most low-cost ETFs issued by Vanguard have expense ratios of less than 0.1%, and even the iShares ETF (which I'm about to discuss) has an expense ratio of just 0.47%.
That might be the one drawback to owning the Roundhill ETF. However, it certainly made up for its high cost in 2024 thanks to its incredible return, and that might be the case again in 2025 if AI stocks continue trending higher.
2. iShares Future AI and Technology ETF
The iShares ETF was established in 2018 with a focus on robotics and AI, but it changed its name and its objective in August 2024. Now it aims to invest in the full value chain of companies in the AI race, including those building AI infrastructure, developing generative AI, providing AI services, and more.
Like the Roundhill ETF, this fund also holds just 50 stocks. Its top five positions account for 23.4% of the total value of its portfolio, and each of them operates in the AI hardware segment:
Stock
iShares ETF Portfolio Weighting
1. Broadcom
5.69%
2. Arista Networks
4.73%
3. Nvidia
4.50%
4. Advanced Micro Devices
4.29%
5. Vertiv Holdings
4.19%
Data source: iShares. Portfolio weightings are accurate as of Dec. 23, 2024, and are subject to change.
Broadcom and Arista Networks supply data center networking equipment, which helps operators optimize their infrastructure. However, Broadcom also makes AI accelerators, which are custom data center chips that some tech giants are using as an alternative to Nvidia's graphics processing units (GPUs).
Advanced Micro Devices, on the other hand, is a direct competitor to Nvidia in the data center GPU market. Plus, it's a leading supplier of AI chips for personal computers, which could be a major growth driver for the company over the next few years as more AI workloads are processed on-device.
The iShares ETF is a little more diversified as you look beyond its top five positions. It holds a stake in many of the AI favorites like Palantir, Amazon, Alphabet, Microsoft, and Meta Platforms.
Since the iShares ETF only restructured its portfolio on Aug. 12 of this year, its performance history is extremely short. However, it's up by 24% since then, which is nearly twice the gain delivered by the S&P 500 over the same time frame. However, a four-month period isn't long enough to draw any real conclusions.
Nevertheless, this looks like a great ETF to buy for 2025 based on the quality of its portfolio -- if AI remains the dominant stock market theme next year, it should perform very well.
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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. Suzanne Frey, an executive at Alphabet, 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. 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, Apple, Arista Networks, Meta Platforms, Microsoft, Nvidia, Oracle, Palantir Technologies, ServiceNow, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Constellation Energy 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.
