Shares of SoundHound AI, C3.ai, and Upstart Plummeted by More Than 70%. Here's a Safer Way to Invest In Artificial Intelligence (AI) Stocks.

Nvidia (NASDAQ: NVDA) stock was up 239% last year, and it's up a further 158% in 2024. In dollar terms, the company added a whopping $2.7 trillion to its market capitalization over that two-year stretch, and it's now the second-most valuable company in the world.

Nvidia generates substantial revenue and earnings growth to support the incredible gains in its stock. The company designs the most powerful graphics processing chips (GPUs) for the data center, which are used for developing artificial intelligence (AI) models, and it simply can't keep up with demand.

Unfortunately, not every AI company will be a winner like Nvidia. Many struggle to deliver the financial results to match their innovation in this fast-moving industry, which has decimated their stock prices over the last few years:

• SoundHound AI (NASDAQ: SOUN) stock is down 74% from its all-time high.
• C3.ai (NYSE: AI) stock is down 85% from its all-time high.
• Upstart Holdings (NASDAQ: UPST) stock is down 89% from its all-time high.

I'm not suggesting any of those stocks are bad investments from today . I'm merely highlighting how challenging it is to pick winners and losers in new industries like AI, because nobody truly knows what the landscape will look like in the future. Therefore, investors might want to consider using a simpler strategy.

Image source: Getty Images.

An exchange-traded fund might be the answer

Exchange-traded funds (ETFs) can hold dozens or even hundreds of individual stocks to give investors exposure to a specific segment of the market like AI. They are managed by a team of professionals who adjust the holdings as necessary, so investors can take a passive approach.

An ETF with hundreds of stock holdings typically won't suffer a catastrophic loss if one or two companies fail, which is a great feature in an industry like AI with so many unknowns.

Here's why the iShares Expanded Tech Sector ETF (NYSEMKT: IGM) might be a great alternative to building a portfolio of AI stocks on your own.

The iShares ETF holds every top AI stock investors could want

The iShares Expanded Tech Sector ETF was established in 2001, so it successfully navigated several technology booms including the internet, enterprise software, smartphone devices, cloud computing , and now, AI. It aims to give investors exposure to the hardware, software, and related companies that make those innovations possible.

The ETF holds 279 stocks, so it's one of the most diversified technology funds investors can buy. However, it's heavily weighted toward its top 10 holdings, which account for 53.9% of the total value of its entire portfolio:

Data source: iShares. Portfolio weightings are accurate as of Oct. 4, 2024, and are subject to change.

All of the above companies are using AI in some capacity. Meta Platforms developed several AI features for both users and advertisers on its Facebook, Instagram, and WhatsApp social networks. The company builds its own large language models (LLMs) called Llama, which power those features. Meta is preparing to launch Llama 4 next year, which CEO Mark Zuckerberg says could set the benchmark for the entire AI industry.

Apple is diving deeper into AI with each new product release. Its Apple Intelligence software is now rolling out on the latest iPhones, iPads, and Mac computers. It will transform the way users consume and generate content, and it will also add powerful new capabilities to the Siri voice assistant.

Microsoft and Alphabet both launched AI-powered virtual assistants of their own, and their respective cloud platforms have become key distribution channels for the latest AI models, software, and data center computing capacity for businesses.

Nvidia's chips power everything I mentioned above. The company's flagship H100 GPU set the benchmark for AI development last year, but it's about to start shipping a new generation of chips based on its latest Blackwell architecture , which will offer a performance boost of up to 30 times. Nvidia does face growing competition, though, with Advanced Micro Devices rapidly becoming a player in the market for AI data center GPUs .

Oracle , Micron Technology , and Palantir are some of the noteworthy AI stocks sitting outside the ETF's top 10 holdings.

The iShares ETF routinely outperforms the S&P 500 index

The iShares ETF has delivered a compound annual return of 10.8% since its inception in 2001, which is much better than the average annual return of 8.2% generated by the S&P 500 index over the same period.

However, the widespread adoption of technologies like enterprise software, cloud computing, and AI propelled the ETF to a compound annual return of 20% over the last 10 years. That extended its advantage over the S&P 500 , which has delivered a compound annual return of just 13.2% over the same period.

The 6.8% differential each year makes a substantial difference in dollar terms thanks to the effects of compounding:

Calculations by author.

It will be a challenge for any fund to maintain an average yearly return of 20% over the long term, but AI could be one of the most valuable technologies in a generation. Goldman Sachs believes it will add $7 trillion to the global economy within a decade, and Cathie Wood's Ark Investment Management places that figure at a whopping $200 trillion by 2030.

Technology stocks are almost certainly the place to be if those forecasts prove to be correct, and the iShares ETF is a great alternative to picking individual winners and losers in the AI race. However, just in case AI fails to live up to the hype, it's a good idea to buy this ETF as part of a diversified portfolio which includes exposure to the non-technology sectors of the market.

Don’t miss this second chance at a potentially lucrative opportunity

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $20,579 !*
• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $42,710 !*
• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $389,239 !*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of October 7, 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 Advanced Micro Devices, Alphabet, Apple, Goldman Sachs Group, Meta Platforms, Microsoft, Netflix, Nvidia, Oracle, Palantir Technologies, Salesforce, and Upstart. The Motley Fool recommends Broadcom and C3.ai 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 .