The artificial intelligence (AI) industry is still relatively new, but it's front-of-mind for investors right now because of the incredible returns generated by stocks like Nvidia, which has surged by more than 700% since the start of 2023 alone. AI has the potential to drive a productivity boom across the global economy, which could create an unprecedented amount of economic value in the coming years.

But past technology revolutions, like the internet, enterprise software, and cloud computing, have taught us that not every company thrives -- or even survives -- over the long term. Therefore, investors who want to own AI stocks should brace for volatility, even among the industry leaders. After all, even Nvidia stock recently suffered a peak-to-trough decline of 27% between June and August.

But there is a way investors can smooth out the noise and even avoid the need to pick winners and losers in the AI race entirely.

An exchange-traded fund might be the answer

An exchange-traded fund (ETF) can hold dozens or even hundreds of individual stocks to track the performance of a specific industry, such as AI. Many ETFs are actively managed, which means a team of professionals will adjust the portfolio as necessary so investors can take a passive approach.

Since an ETF can hold so many stocks, it typically won't suffer a catastrophic loss if one or two companies fail. That's an ideal feature in an industry like AI because it's nearly impossible to predict which companies will succeed or fail in the coming years.

With that in mind, here's why the Roundhill Generative AI and Technology ETF (NYSEMKT: CHAT) might be a great option for investors.

Every popular AI stock packaged into one ETF

Roundhill's managers believe AI will be one of the most impactful technologies in the coming decades. On its website, the ETF cites a Goldman Sachs report that suggests AI could add a whopping $7 trillion to the global economy by 2032.

To capture some of that value, the Roundhill ETF holds 55 different stocks spread across both the hardware and software segments of the AI industry. Its top 10 holdings, specifically, include some of the most popular AI stocks investors have been clamoring to own over the past year:

Data source: Roundhill. Portfolio weightings are accurate as of Aug. 27, 2024, and are subject to change.

Per the above table, those 10 holdings alone account for 43.8% of the total value of the ETF's entire portfolio. That level of concentration can pose risks because the fund's performance is often beholden to just a handful of stocks. With that said, it's a very high-quality list of names.

Nvidia designs the most powerful data center chips for AI development. Demand continues to outstrip supply for its flagship graphics processing units (GPUs), like the H100 and H200, and conditions could tighten further as the company ramps up shipments of its new Blackwell-based GPUs into the end of this year. They will offer a sizable performance boost while reducing energy consumption and cost of ownership for data center operators.

Microsoft, Alphabet, and Amazon are three of Nvidia's biggest customers. They are filling their data centers with GPUs and renting the computing power to their cloud customers, who use it to develop AI and deploy it into their businesses. Plus, all three tech giants have developed AI chatbots and virtual assistants of their own that they are embedding into some of their legacy products.

The Roundhill ETF also owns several other important AI stocks outside its top 10 holdings. They include Oracle, which operates some of the best AI infrastructure in the world, and Micron Technology, a leading supplier of memory and storage chips, which are increasingly important to the AI revolution.

The Roundhill ETF is delivering solid returns

The Roundhill ETF was just established in May 2023. It's trading up 40% since then, which beats the 34% return in the S&P 500 index over the same period. Perhaps that is no surprise since the ETF has a much higher allocation to Nvidia, for example, which is the best-performing stock in the entire S&P 500 this year (as it was last year, too).

If AI proceeds to add trillions of dollars to the global economy, then the Roundhill ETF is a great place for investors to park their money. However, investors need to be aware of the concentration risk I highlighted earlier because if AI fails to live up to the hype, stocks like Nvidia will almost certainly lose a chunk of their value. That could lead to a period of underperformance for the ETF.

The Roundhill ETF also has a 0.75% expense ratio, the proportion of the fund deducted each year to cover management costs. Some ETF issuers, like Vanguard, charge expense ratios of as little as 0.03%, but the Roundhill ETF is actively managed and highly specialized, so a premium is to be expected. Nevertheless, high expense ratios can eat into investors' returns over the long term, so it's something to keep in mind.

With all that said, buying the Roundhill ETF can be a great alternative to picking a basket of individual AI stocks, especially for investors who don't have the time to track every development in this fast-moving industry.

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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 Adobe, Advanced Micro Devices, Alphabet, Amazon, Goldman Sachs Group, Meta Platforms, Microsoft, Nvidia, Oracle, and Taiwan Semiconductor Manufacturing. The Motley Fool 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.

Investing in Artificial Intelligence (AI) Stocks Can Be Risky, but Here's a Fantastic Way to Do It was originally published by The Motley Fool