There are other ways to invest in AI besides Nvidia—here's how to pick an AI ETF.

Nvidia, a chipmaking giant, reported second-quarter financial results after the closing bell on Wednesday, and the numbers were predictably impressive. The firm reported a 122% increase in sales in the quarter ending in July to go along with earnings that eclipsed Wall Street expectations.

Shares were down about 6% on Thursday.

Nvidia's stock price is up 146% on the year and 2,700% over the past half-decade, despite the company posting better-than-expected results. This has led investors to question whether they have already factored in astronomical growth expectations into the current stock price.

If you believe that AI will transform the way American businesses operate, Nvidia will not be the only significant beneficiary.

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An exchange-traded fund (ETF) is a great way to gain broad exposure to AI stocks. By investing in an ETF, you can diversify your portfolio and reduce the risk of losing money if one particular AI stock underperforms.

Todd Rosenbluth, head of research at TMX VettaFI, states that if you are a believer in the overall trend towards artificial intelligence, you must understand that not all stocks will rise or fall in the same manner. As a result, an ETF provides you with the opportunity to participate in the trend while minimizing some of the associated risks.

How an AI ETF can fit into your portfolio

To find the right AI ETF, you need to do more than just search for "artificial intelligence" on your brokerage's website. Many fund firms add "AI" to their fund names to attract investors interested in the latest trend.

Rosenbluth states that AI is mentioned in four types of funds.

1. AI stock pickers

These funds do not necessarily invest in companies related to AI, but instead use AI in their stock-picking strategy.

Rosenbluth states that the strategies employed by these firms, including T. Rowe Price and Fidelity, in picking stocks are similar to those of other firms.

2. AI and robots funds

Some companies specialize in the intersection of AI and robotics, with a focus on either industry or both.

According to Rosenbluth, these won't be entirely focused on AI or robotics.

3. Generative AI funds

The funds in question concentrate on companies that employ generative AI technology, which can be found in tools such as ChatGPT and Google Gemini. These funds typically feature large, well-known tech companies at the top of their portfolios. One such fund, offered by Roundhill Investments, has Nvidia, Microsoft, Alphabet, and Meta among its top holdings.

4. AI beneficiary funds

Although most funds invest in large tech companies' AI tools, other funds also invest in businesses that could benefit from the technology's widespread adoption.

"Rosenbluth states that the company is more diversified at the holding level, with a decrease in concentration on mega-cap stocks and an increase in ownership of companies outside of the "magnificent seven" to gain exposure to artificial intelligence."

How to choose an ETF

Examine the portfolio of an ETF before reading the fact sheet and prospectus to determine if it's suitable for you.

According to Rosenbluth, one advantage of an ETF is its daily transparency. By checking the fund's website or any other public website, you can view the top 10 holdings. In reality, most ETFs reveal their entire portfolio on free, publicly accessible websites.

Before investing in a thematic ETF, compare its portfolio with your current holdings, as it can serve as a complement to your core portfolio, advises Rosenbluth.

Your core holding is a fund that mirrors the performance of the Nasdaq-100, which tends to invest in large-cap, growth-oriented stocks. Adding a generative AI fund, which holds many of the same top names in your portfolio, may not significantly impact your performance. Instead, you may prefer a broader AI-themed ETF.

Adding a more targeted AI fund to a well-rounded core portfolio can help tilt it towards growth and this specific theme, according to Rosenbluth.

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