Here's a guide to selecting the top AI companies for long-term investment.

• The Magnificent Seven tech stocks reached astronomical heights in 2023 due to the excitement surrounding artificial intelligence.
• On Friday, the Nasdaq Composite dropped over 2% and Nvidia fell 10%.
• One expert advised that investors in the AI space should diversify by selecting ETFs that include multiple names with staying power.

The groundbreaking launch of ChatGPT in November 2022 has transformed the investing landscape with the help of artificial intelligence.

Since then, investors have poured money into all things related to AI as they hunt for the next big winners. In 2023, a group of major technology players dubbed the Magnificent Seven — , , , , , and — contributed to a large chunk of the market's rally.

In 2024, the tail winds that had been present continued, but even the victors eventually reached their limit. As a result, some of the year's top performers experienced a decline on Friday, with Big Tech companies contributing to the drop in the stock market by more than 2%.

"Jay Woods, chief global strategist at Freedom Capital Markets, emphasized the importance of doing one's work in the field of AI. He stated that individuals must conduct research, understand the risks involved, and make informed decisions before investing in this rapidly evolving industry."

As technology advances, AI is expected to become a crucial element in the transition from early-stage to second-stage adopters. Investors seeking long-term opportunities in this field may need to adopt specific strategies, according to portfolio and wealth managers.

What to look for

Investing in artificial intelligence stocks requires no secret formula, but investors can monitor specific metrics and trends to distinguish between successful and unsuccessful investments.

Carol Schleif, chief investment officer at BMO Family Office, advises investors to closely monitor a company's cash burn and spending habits when investing in new industries. Pay close attention to the intricacies, such as how a company manages its backlog and allocates funds towards infrastructure.

Schleif advises examining government grants in addition to chip stocks. The CHIPS Act, signed into law by President Biden in 2022, provided funding for semiconductor production on U.S. soil, resulting in a significant industry win.

Samsung Electronics is set to receive funding from CHIPS for semiconductor production in Texas, with a potential award of up to $8.5 billion.

Schleif advised focusing on the underlying fundamentals and their direction, rather than just last quarter's earnings.

Investors should be cautious about blindly investing in companies that have benefited from AI enthusiasm. Nancy Tengler, CEO and CIO of Laffer Tengler Investments, suggests looking at old-economy stocks that are adapting to the new digital wave. She recommends considering companies like and , both tech industry veterans.

Diversification is crucial for portfolio building, as advised by financial advisors and portfolio managers, and also applies to AI.

Instead of investing in a single promising stock related to AI, an exchange-traded fund (ETF) that offers diversified exposure to a basket of stocks in the AI theme may be a better option.

Consider diversifying through ETFs

Diversifying through ETFs that include multiple names can be a lower-risk strategy, according to Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.

She emphasized the importance of the , the and the Global X Artificial Intelligence & Technology ETF (AIQ).

"Schleif from BMO advised that one way to gain exposure without risking everything is to diversify and focus on multiple avenues. This way, you can withstand the unpredictability of the market."

New investors may find volatility in the stock market to be a bitter pill, as stocks tend to rise initially when a new theme emerges, but often experience volatility and pullbacks at some point, according to Helen Dietz, a CFP and managing director at Aspiriant.

"The trendier the trend, the more unpredictable it becomes," she stated. "The adjustments of individual stocks or sectors can sometimes be quite sudden, causing fear among investors."

On Friday, Nvidia's shares experienced a 10% decline, marking their worst day since March 2020. This setback put a significant dent in the chip stock's year-to-date gains, but it still remains up nearly 54% in 2024. Additionally, fellow AI play also suffered a nosedive that day, falling 23%.

ETFs can have different names and weightings. While the BOTZ ETF and the Roundhill Generative AI and Technology ETF (CHAT) have underperformed some of this year's popular AI winners, their underlying holdings are diverse. BOTZ includes Nvidia and robotics, while CHAT's top holdings are Microsoft, Meta, and .

ETFs with high trading volume and reputable companies are recommended by Schleif. However, investors should be cautious of fees that can negatively impact returns if they are too high.

ETFs provide investors with a lower-risk way to gain exposure to the tech sector, even though the returns may not match the surge seen in companies like Nvidia and Meta, according to Woods. In the long run, investors can use the leadership of these funds to identify promising individual names.

"Woods stated that the old cliché is timing the market and hoping to find that individual stock that can be a big performer. To be involved, diversification is key, and he believes an ETF is the best way to achieve this."