Undoubtedly, artificial intelligence (AI) is revolutionizing markets, and many believe that its influence is only set to grow. Last year, the fervor surrounding this technological industry pushed the leader in data center chips for AI workloads, Nvidia, into the multi-trillion-dollar club. And this momentum persists, as just two days ago, Nvidia surged to record highs, surpassing longstanding leaders such as Apple and Microsoft, and solidifying its position as the most valuable company.
As a result, many are eager to invest in Nvidia. However, you should keep in mind that while significant short-term gains may be possible, this investment approach may not be suitable for the long run.
History has shown us that identifying long-term winners in any tech revolution can be challenging. For instance, despite the success of many technology companies years ago, some of them, such as the ones from the dot-com era have faded away; and only few, like Amazon, have pivoted successfully, finding their greatest successes in unexpected ventures.
And such a shift can teach us a crucial investment lesson: betting on individual companies in a rapidly evolving tech landscape is fraught with uncertainty.
Therefore, while the AI sector seems to promise substantial gains, it involves a lot of uncertainty, however, you can manage this uncertainty by choosing Exchange-Traded Funds (ETFs).
ETFs bundle many stocks into one investment, therefore, you are investing in lots of companies at once within a sector; and this approach helps lower risk because your money is not tied to just one company and you can balance out the ups and downs in the market.
Now, you might be wondering: which ETF is the best bet to ride the wave of AI’s potential? Well, due to its strong performance over the years, the iShares Expanded Tech Sector ETF (IGM) might be compelling option. IGM owns a mix of 278 different stocks, with the top five making up 42.9% of its value. These include big names in AI like Nvidia, Apple, and Microsoft.
Additionally, IGM has had a strong track record since its inception in 2001, as it has proven to be able to adapt and benefit from technological advancements over time. In fact, over the past five years, it has achieved a compound annual return of 20.7%, outpacing the S&P 500’s 15.7% gain – this robust return has been driven by its top holdings.
Therefore, if you invest in this ETF, you are up for significant gains if the AI rally continues. However, as stated before, you should keep in mind that this as a long-term investment strategy.
For instance, if you invest $300,000 in this ETF and it continues its recent trend with a 19.7% compound annual return, your investment could grow to $1.5 million in approximately 11 to 12 years. Even if the growth rate returns to the long-term average of 10.6%, reaching $1.5 million could still be achievable in about 16 years.
And what if the positive trend in AI changes direction? Well, IGM has a backup plan to minimize losses. This ETF spreads its investments across many companies, including companies with strong non-AI business foundations. Thus, although the IGM could underperform if the AI sector fails to meet expectations, its diversified nature provides some buffer against such downturns.
Moreover, it is worth noting that since IGM recently completed a 6-for-1 stock split, its shares are now more affordable for smaller investors. Let’s remember that stock splits increase the number of shares and reduce the price per share, thus, investors can now purchase IGM’s shares at around $94, down from $512 pre-split.
Ultimately if you are intrigued by AI’s potential but wary of the unpredictability of individual stock picks, IGM offers an accessible, diversified investment path. This ETF will allow you to tap into the AI wave, mitigating risk while positioning for substantial growth.
