The artificial intelligence (AI) industry is still very young, but investors have already observed its incredible potential to create value. Nvidia, for example, added $2.8 trillion to its market capitalization since the start of 2023 alone. However, AI is evolving quickly, and picking the winners and losers over the long term won’t be easy.
Buying an exchange-traded fund (ETF) can be a great solution to that challenge for most investors. The iShares Expanded Tech Sector ETF (NYSEMKT: IGM) holds every leading AI stock investors could want, so it’s a solid candidate to consider.
The iShares Expanded Tech Sector ETF just completed a stock split
The iShares ETF delivered a compound annual return of 21.7% over the last five years, far outpacing the average annual return of 15.7% in the S&P 500 index over the same period.
As a result, the iShares ETF was trading above $510 in March, which made it relatively expensive for smaller investors to buy. To fix that problem, iShares executed a 6-for-1 stock split that increased the number of shares in circulation sixfold and organically reduced the price per share by a proportional amount.
The stock split hasn’t changed the underlying value of the ETF, but one share now trades for under $100, which makes it accessible to a broader investor base. AI could drive further momentum for the fund; here’s how it could turn $500 per month into $1 million over the long term.
The iShares ETF holds every popular AI stock investors could want
Many AI-specific ETFs have hit the market over the last few years, but they typically hold a small number of stocks. The iShares ETF, however, has the benefit of a broad portfolio with 281 holdings representing not only AI, but also cloud computing, enterprise software, streaming, cybersecurity, and more.
With that said, the top 10 holdings in the iShares ETF account for 53.7% of the entire value of its portfolio. Most of the leaders in AI are included in that top 10, so investors do get a relatively high exposure to this fast-growing industry:
|
Stock |
iShares ETF portfolio Weighting |
|---|---|
|
1. Apple |
8.62% |
|
2. Microsoft |
8.56% |
|
3. Meta Platforms |
8.51% |
|
4. Nvidia |
8.02% |
|
5. Alphabet Class A |
4.76% |
|
6. Broadcom |
4.46% |
|
7. Alphabet Class C |
3.99% |
|
8. Netflix |
2.37% |
|
9. Advanced Micro Devices |
2.31% |
|
10. Adobe |
2.06% |
Data source: iShares. Portfolio weightings are accurate as of July 8, 2024, and are subject to change.
Apple just crossed $3.5 trillion in market capitalization, making it the world’s largest company once again after briefly slipping behind Microsoft. Its new Apple Intelligence software (developed in partnership with OpenAI) will transform the Siri voice assistant, and it will allow users to rapidly craft content in Notes, Mail, iMessage, and more. Apple has 2.2 billion active devices globally, so it could become the largest distributor of AI to consumers.
Microsoft agreed to invest $10 billion in OpenAI in December 2023, and it used the start-up’s technology to create its Copilot virtual assistant. Copilot is accessible in core products like Windows and 365 (Word, Excel, PowerPoint, and more) to help users boost their productivity. Plus, developers can use OpenAI’s latest GPT-4 models to create their own AI applications through the Microsoft Azure cloud platform.
None of the above would be possible without Nvidia. Its graphics processing units (GPUs) for the data center have trained the world’s most advanced AI models to date — including GPT-4 — and red-hot demand for those chips has sent the company’s revenue soaring.
The iShares ETF owns other popular AI stocks like Oracle and Micron Technology, which sit outside its top 10. Beyond AI, it also owns cybersecurity stock Palo Alto Networks, cloud software stock Datadog, and social media stock Pinterest, which are just a few notable names.
Turning $500 per month into $1 million
The iShares ETF generated a compound annual return of 10.9% since its inception in 2001. But the accelerated adoption of technologies like enterprise software, cloud computing, and AI have driven a much faster compound annual gain of 20.2% over the last 10 years.
The below table shows the potential future returns from investing $500 per month in the iShares ETF over 10, 20, and 30 years:
|
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 |
20.2% |
$194,180 |
$1,629,866 |
$12,272,092 |
Calculations by author.
It’s incredibly unlikely the iShares ETF (or any fund) will sustain a 20.2% return over a 30-year period. The S&P 500, for example, has only delivered a compound annual return of 10.4% since it was established in 1957, and it has a strict criteria to ensure it only holds the 500 best U.S. stocks. With that said, the iShares ETF could turn $500 per month into $1 million over 30 years even if its average annual return falls back to its long-run average of 10.9%.
There is the potential for higher returns if AI lives up to Wall Street’s forecasts. Goldman Sachs thinks it will add $7 trillion to the global economy over the next decade, whereas PwC places that figure at $15.7 trillion by 2030. The ETF’s top holdings like Apple, Microsoft, and Nvidia could capture a significant portion of that pie.
On the flip side, those stocks are currently trading at a premium right now because of their AI initiatives. So, if the technology doesn’t live up to the hype, they could lose some of their recent gains, which would trigger a period of underperformance for the iShares ETF. That’s a risk investors must consider, and it’s a good argument for owning the ETF as part of a balanced portfolio.
Should you invest $1,000 in iShares Trust – iShares Expanded Tech Sector ETF right now?
Before you buy stock in iShares Trust – iShares Expanded Tech Sector ETF, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and iShares Trust – iShares Expanded Tech Sector ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $826,672!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of July 8, 2024
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. 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, Apple, Datadog, Goldman Sachs Group, Meta Platforms, Microsoft, Netflix, Nvidia, Oracle, Palo Alto Networks, and Pinterest. The Motley Fool recommends Broadcom and 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.
1 Stock-Split ETF That Could Turn $500 Per Month Into $1 Million, With Nvidia’s Help was originally published by The Motley Fool