Artificial Intelligence Investing is More Than Just Nvidia

Invested in the S&P 500 Index or the Nasdaq 100? You Already Own Nvidia.

What’s unique about Nvidia compared to other mega cap tech companies that turn household names is that it lacks a direct-to-consumer product. (That is, unless you were gaming in your parents’ basement circa 2010.) Consider the other six stocks included in the Magnificent Seven, like Apple, Microsoft, Amazon, Meta, Tesla, and Alphabet.

Yet, Nvidia’s meteoric rise has been astonishing. At one point in May of 2023, it was one of just five stocks (all of which made the usual suspect list above) that accounted for 96 percent of the gains of the S&P 500 Index[3]. Stock price growth has propelled its market cap into the rather exclusive $1 trillion club, with its weight in the S&P 500 Index[4] now resting north of three percent.

Nvidia ranks as one of the top four holdings within one of the most widely held stock market indices in the world as of November 2023. In fact, the company’s market cap is now larger than the entire real estate sector allocation within the S&P 500 Index[5]. Chances are high you already have exposure to it without even trying.

Opportunities in a Broader AI Ecosystem

Investing in artificial intelligence can be achieved by investing in the hardware enabling powerful algorithms to run, like Nvidia’s GPUs or compute and memory devices made by other publicly traded semiconductor companies. Using a California Gold Rush analogy, semiconductor developers and manufacturers like these provide the picks and shovels.

Taking it one step further, the gold miners would be the end companies creating software and code to run natural language processing models, chatbots, voice recognition, and myriad other applications to solve problems. Gold miners would also be hardware companies, developing things like autonomous vehicles, robotics, and drones.

Literal gold rushes also teach investors valuable lessons that are applicable to the proverbial ones. It’s often not your average gold miner who reaps the profit; panning for gold tends to be feast or famine. It’s the ancillary businesses and the economy at large that benefit more broadly from positive externalities of the boom.

In the same manner, innovative companies – one’s that aren’t directly dealing in AI – will undoubtedly continue to find disruptive ways to apply the technology. An example of this is the use of natural language processing and image recognition in insurance for handling claims or biotech companies using artificial intelligence to develop compounds that could be the next wave of transformative therapeutics.

Knowing this, investors would be wise to diversify their bets, especially across a portfolio of miners who could strike gold. Likewise, they should think bigger than a single pick and shovel provider, like Nvidia. AI is a transformative megatrend that has the potential to influence nearly all aspects of how we live and work for years to come.

Unlocking Diversification & Reducing Overlap Within the AI Megatrend

Broad equity market investors may experience productivity benefits enjoyed by the application of AI technologies indirectly. That may be accomplished with low-cost beta exposure to a U.S. stock market index. For more direct access, though, investors might consider an allocation to the AI theme via a diversified ETF.

A general technology sector ETF that tracks the Nasdaq 100 Index is a start. This approach, however, leaves investors with a more concentrated dose of medicine they’re likely already taking. The S&P 500 Index skews toward growth stocks, with its heaviest sector allocation being a hearty 28 percent to large cap tech companies6 as of the end of October 2023. Said differently, there’s substantial overlap between market-weighted technology ETFs and the S&P 500 Index, mostly from the Magnificent Seven.

For a strategy that provides direct and differentiated exposure within the artificial intelligence theme, investors might consider WisdomTree Artificial Intelligence and Innovation Fund (WTAI). This ETF has lower overlap to broader equity markets and spreads dedicated allocations across sub-niches within the AI industry, like software, semiconductors, other hardware, and innovative companies that are using technology in disruptive ways.

For investors initiating a position in AI or adding exposure to their portfolios, it’s important to consider that we’re currently closer to the beginning than the end of this story. Eventually, almost everyone using software will be using generative AI without realizing it. It’s impossible to predict the next big winner within a world altering trend.

Investing to take advantage of the different parts of the AI ecosystem as they heat up and cool down may be a prudent way to take advantage of this potential high-growth opportunity.

For more detail on the fund including a full list of holdings, click here.

[1] https://nvidianews.nvidia.com/news/nvidia-announces-financial-results-for-third-quarter-fiscal-2024

[2] https://nvidianews.nvidia.com/news/nvidia-announces-financial-results-for-third-quarter-fiscal-2024

[3] https://finance.yahoo.com/news/5-companies-driving-96-stock-152932047.html

[4] https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview

[5] https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview

[6] https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview

Glossary:

Beta: A measure of the volatility of a security or a portfolio in comparison to a benchmark. In general, a beta less than 1 indicates that the investment is less volatile than the benchmark, while a beta more than 1 indicates that the investment is more volatile than the benchmark.

Nasdaq 100: Includes 100 of the largest domestic and international non-financial companies listed on The Nasdaq Stock Market based on market capitalization. The Index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain securities of financial companies, including investment companies.

Important Information:

Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. To obtain a prospectus containing this and other important information, please call 866.909.9473, or visit WisdomTree.com/investments to view or download a prospectus. Investors should read the prospectus carefully before investing.

Past performance is not indicative of future results.

There are risks associated with investing, including possible loss of principal. The Fund invests in companies primarily involved in the investment theme of Artificial Intelligence (AI) and Innovation. Companies engaged in AI typically face intense competition and potentially rapid product obsolescence. These companies are also heavily dependent on intellectual property rights and may be adversely affected by loss or impairment of those rights. Additionally, AI companies typically invest significant amounts of spending on research and development, and there is no guarantee that the products or services produced by these companies will be successful. Companies that are capitalizing on Innovation and developing technologies to displace older technologies or create new markets may not be successful. The Fund invests in the securities included in, or representative of, its Index regardless of their investment merit and the Fund does not attempt to outperform its Index or take defensive positions in declining markets. The composition of the Index is governed by an Index Committee and the Index may not perform as intended. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.

You cannot invest directly in an index.

WisdomTree Funds are distributed by Foreside Fund Services, LLC.