Over the past three decades, investors have had no shortage of forward-looking investment opportunities. These include the advent of the Internet, which changed the growth trajectory of American businesses, as well as the decoding of the genome and blockchain technology, to name a few trends.
However, since the Internet took over in the mid-1990s, no investment trend has attracted as much attention as artificial intelligence (AI). AI involves the use of software and systems instead of humans, with machine learning giving these systems the ability to evolve over time and perform their tasks better.
Although estimates of AI’s potential vary widely – which is not surprising given that companies are not entirely sure how AI can increase their sales – analysts at PwC estimate that it will add more than $15 trillion to the global economy US dollar will be enriched in 2030. That is a high number that should not be ignored.
No company has been a more direct beneficiary of the AI revolution than the semiconductor titan Nvidia (NASDAQ:NVDA).
The face of the AI revolution may lie in a bubble
Nvidia gained notoriety through its infrastructure, which quickly became the basis for AI-accelerated data centers. Specifically, Nvidia’s A100 and H100 graphics processing units (GPUs) are expected to account for approximately 90% of GPUs deployed in high-performance data centers this year. Nvidia also recently unveiled its next-generation chip, Blackwell, which can accelerate data processing and advance quantum computing and generative AI solutions.
Nvidia is undeniably benefiting from corporate demand, which significantly exceeds the supply of its powerful GPUs. Phenomenal pricing power was the clear catalyst that drove Nvidia’s data center revenue up 217% in fiscal 2024 (ending January 28, 2024).
But when things seem too good to be true in the corporate world, they usually are. While there have been numerous catalysts for Nvidia since the start of 2023 – the company has increased its market value by almost $1.8 trillion in less than 16 months – some headwinds suggest that this AI darling may be in a bubble.
Nvidia’s three biggest enemies appear to be history, itself and its top customers.
As for the former, there hasn’t been an investment in the next big thing in the last 30 years where investors haven’t overestimated the adoption or adoption of a new innovation/trend. Every single highly touted technology or trend has survived an early-stage bubble. There’s a good chance that AI stocks will continue this pattern and at some point soon will no longer meet investors’ high growth and adoption expectations.
The second potential problem for Nvidia can be seen by looking in the mirror. Nvidia’s revenue growth last year was driven by its pricing power in GPUs. As new competitors enter the market and Nvidia increases production of its A100 and H100 GPUs and introduces new chips, the GPU shortage will steadily decrease. In short, Nvidia will hurt its gross margin if it expands production.
But the worst thing of all for Nvidia could be that its four largest customers, which account for about 40% of sales, develop their own AI chips. Whether these trillion-dollar companies intend to use their in-house chips to complement Nvidia’s GPUs or replace them entirely, the point is that orders from these top customers have likely peaked.
This Exchange Traded Fund (ETF) is the smartest and safest way to invest in artificial intelligence
While Nvidia is the clear winner among AI stocks, it also arguably has the biggest downside risk if history proves correct and the AI bubble bursts. Luckily, there is another way for investors to gain AI exposure at the click of a button without having to risk putting their money into a potential stock bubble.
Exchange traded funds (ETFs) contain a basket of securities that often have a specific focus. For example, investors can buy ETFs in large-cap stocks, growth stocks, emerging market companies, etc. There are a number of ETFs that offer a glimpse into the artificial intelligence revolution.
However, not all ETFs are created equal. In addition to variations in their net expense ratios (the fees charged for managing an ETF), there may be significant differences in diversification or concentration.
For example the Invesco QQQ Trust (NASDAQ:QQQ) is an ETF that seeks to reflect the performance of growth-oriented companies Nasdaq-100. Many of the leading AI companies are included in the Nasdaq-100, including Nvidia, Microsoft, Metaplatforms, AmazonAnd alphabet.
Unfortunately, Invesco QQQ Trust is not very diversified. The seven largest companies by allocation account for more than 42% of the weighting, with Nvidia accounting for about 6%. If the AI bubble bursts, the Invesco QQQ Trust will likely come under pressure.
The only unusual artificial intelligence ETF that enables smarter and safer investing than Nvidia is the Robo Global Robotics and Automation Index ETF (NYSEMKT:ROBO). Even though the net expense ratio is quite high at 0.95%, this ETF is well worth the premium due to its focus and diversification.
What sets the Robo Global Robotics and Automation Index ETF apart is its various investments in the companies behind the technology used to develop intelligent systems, as well as the company’s implementation of intelligence systems and robotics/automation. In other words, this is not a pure AI ETF. Rather, it is an established ETF (it launched in October 2013) that happens to have AI as one of its many focuses. So if the AI bubble bursts, a majority of the companies in which this ETF invests would be partially or completely isolated.
The other advantage of the Robo Global Robotics and Automation Index ETF is its diversification. As of April 9, the company held shares in 77 stocks, none of which represented more than 1.81% of invested assets. Nvidia is one of its 77 holdings, but only has a weighting of 1.47%.
The second largest holding in this ETF, which is one of the best performing robotics, automation and AI companies over the long term, is Intuitive surgery (NASDAQ:ISRG). Since the beginning of the century, Intuitive Surgical has installed more than 8,600 of its da Vinci surgical systems, supporting surgeons in a variety of soft tissue procedures. Intuitive is the clear market leader in robotic surgical systems and the growth prospects for these systems stretch as far as the eye can see.
The Robo Global Robotics and Automation Index ETF offers a smarter, safer way to benefit long-term from the AI revolution.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Sean Williams has held positions at Alphabet, Amazon, Intuitive Surgical and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Intuitive Surgical, Meta Platforms, Microsoft and Nvidia. The Motley Fool recommends the following options: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has a disclosure policy.
Forget Nvidia: This ETF is a smarter, safer way to invest in the artificial intelligence (AI) revolution. It was originally published by The Motley Fool