The artificial intelligence (AI) industry is still in its infancy, but investors already witnessed its incredible potential to create value. Since the start of 2023, Nvidia‘s (NASDAQ: NVDA) market capitalization has grown from $360 billion to $3.3 trillion, almost entirely because of soaring sales of its AI data center chips.
But the industry is evolving fast, so picking the long-term winners and losers won’t be easy. That’s why buying an exchange-traded fund (ETF) that holds several different AI stocks could be the best strategy for investors. It can offer exposure to the value created by AI in a diversified manner, which can insulate investors from severe losses if some companies fail.
Despite holding hundreds of stocks, the iShares ETF is very concentrated. Its top three positions alone account for 25.3% of the value of its entire portfolio:
Data source: iShares. Portfolio weightings are accurate as of Dec. 16, 2024, and are subject to change.
Meta, Nvidia, and Apple could be three of the most important names in AI over the long term. Meta created the world’s most popular open-source large language model (LLM), called Llama, which has been downloaded more than 600 million times. The company is using it to create AI features for Facebook and Instagram, but Llama also provides businesses and developers with a cost effective way to create AI software.
Nvidia’s graphics processors (GPUs) for the data center are the most advanced in the industry for developing AI. The company just started shipping its new Blackwell chips, which offer a significant performance boost compared to its flagship H100, and sales are expected to ramp up extremely fast. That’s why I think Nvidia could be one of the best performing stocks in the tech sector next year.
Then there is Apple, which is fresh off the launch of its Apple Intelligence software. It introduces several new AI features for owners of the latest iPhones, iPads, and Mac computers. Powerful writing tools can instantly summarize emails and text messages, and they can also proofread or completely rewrite outgoing text content. Apple Intelligence also generates images, prioritizes notifications, and injects new capabilities into the Siri voice assistant.
Apple has over 2.2 billion active devices globally, so it could become the largest AI access point for consumers in the world.
Outside of its top three positions, the iShares ETF holds several other top AI stocks including Microsoft, Alphabet, Oracle, and Advanced Micro Devices.
The iShares ETF generated a compound annual return of 10.9% since its inception in 2001. However, it delivered an accelerated compound annual gain of 20.1% over the last 10 years, thanks to the widespread adoption of technologies like cloud computing, enterprise software, and now AI.
The below table displays the potential returns investors could earn over the next 10 years, 20 years, and 30 years, based on three different growth scenarios:
|
Monthly Investment
|
Compound Annual Return
|
Balance After 10 Years
|
Balance After 20 Years
|
Balance After 30 Years
|
|
$500
|
10.9%
|
$109,351
|
$431,517
|
$1,385,024
|
|
$500
|
15.5% (midpoint)
|
$144,201
|
$814,558
|
$3,941,733
|
|
$500
|
20.1%
|
$192,926
|
$1,605,356
|
$11,972,727
|
Calculations by author.
It will be almost impossible for the iShares ETF — or any fund — to deliver an annual gain of 20% for the next 30 years. If Nvidia grew by 20% annually for the next three decades, its market capitalization would reach $783 trillion. That’s more than 20 times the size of the entire U.S. economy today, which is a good example of how the law of large numbers can prevent outsize returns for extended periods of time.
The benchmark S&P 500, for example, returned an average of 10.4% since it was established in 1957, and it strictly holds 500 of the highest-quality companies listed on U.S. stock exchanges.
With all of that said, the iShares ETF could turn $500 per month into $1 million over 30 years even if its annual return reverts back to its long-term average of 10.9%. AI could drive better gains over the next few years because of its incredible potential to create value — Goldman Sachs predicts the technology will add $7 trillion to the global economy over the coming decade, whereas PwC places that number at $15.7 trillion by 2030.
Although there is a wide gap between those estimates, they highlight just how bullish Wall Street is. However, if AI fails to live up to the hype, stocks like Meta Platforms, Nvidia, and Apple could lose a large chunk of the value they have created over the last couple of years.
As a result, investors should only buy the iShares ETF as part of a balanced portfolio of other funds and individual stocks.
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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, Apple, Goldman Sachs Group, Meta Platforms, Microsoft, Nvidia, and Oracle. 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.
Nvidia, Meta Platforms, and Apple Could Help This Unstoppable ETF turn $500 Per Month Into $1 Million was originally published by The Motley Fool
