Amid the frantic chase for the next winning AI unicorn, what is less obvious is the slow and steady approach of being diversified and yet staying exposed to the AI growth opportunity.
Yes – “focus” on AI while being “diversified” in holdings.
But how?
First, understand that AI is a layered ecosystem of different sectors, not a single “celebrity” stock.
Second, focus on key sectors that matter – Infrastructure, Software, and Application.
Third, identify the Exchange-Traded Funds (ETFs) that anchor each of those sectors.
Finally, allocate your money across these ETFs in a way that reflects your investment preference.
Core Infrastructure
This is the foundation of AI that the other layers are sitting on.
General-purpose GPUs like those from NVIDIA (NASDAQ: NVDA) for AI compute fall into this category.
So do Broadcom’s (NASDAQ: AVGO) and Marvell’s (NASDAQ: MRVL) custom chip designs for specific inference tasks.
These chip designers are supported by the advanced manufacturing from Taiwan Semiconductor Manufacturing Company (NYSE: TSM), or TSMC, required to package them seamlessly with other supporting components like memory stacks.
And TSMC’s world-class manufacturing wouldn’t be possible without ASML Holding’s (NASDAQ: ASML) extreme ultraviolet (EUV) systems, for which it maintains a global monopoly.
All of the above names are included in the holdings of ETFs such as VanEck Semiconductor ETF (NASDAQ: SMH) and iShares Semiconductor ETF (NASDAQ: SOXX).
VanEck’s top three holdings are highly concentrated in the current semiconductor winners of NVIDIA, TSMC, and Broadcom, with weightings of 21.38%, 9.57%, and 6.60%, respectively.
In contrast, iShares offers broad-based exposure, with two of its top three holdings coming from emerging names, Micron Technology (NASDAQ: MU) and Advanced Micro Devices (NASDAQ: AMD), aside from NVIDIA.
Notably, iShares’s NVIDIA holding is only 6.81%, comparable to Micron’s 8.54% and AMD’s 8.09%.
The verdict?
VanEck is a bet on the continued growth of a concentrated group of winners, while iShares investors could benefit if the AI growth trajectory broadens to include emerging names.
AI Model and Software Growth
Above the hardware sits the software layer, where trained AI models are put to work, providing AI-as-a-Service (AIaaS).
If implemented correctly, they automate enterprise workflows and help transform companies like ServiceNow (NYSE: NOW) and Microsoft (NASDAQ: MSFT) into indispensable Systems of Record (SoR).
Beyond SoRs, companies like Palantir (NASDAQ: PLTR) go even further to provide Systems of Intelligence (SoI), synergising fragmented enterprise data into unified insights that enable real-time decision-making in high-stakes operational environments.
Notably, this software layer is generally asset-light, unlike the high capital expenditure (CapEx) nature of the infrastructure layer.
However, while being asset-light potentially leads to higher cash flows, it is susceptible to disruptions if today’s leaders are made obsolete by tomorrow’s innovation, resulting in sharp corrections.
As such, the software layer is structurally less defensive than the pick-and-shovel play of the core infrastructure layer in the long run, although the infrastructure layer faces short-term oversupply risks.
However, ETFs’ diversified nature mitigates the risks.
To capture the growth from this software “brain” of AI, you can look at the Global X Artificial Intelligence & Technology ETF (NASDAQ: AIQ), which provides broad exposure to companies developing or benefiting from AI technology.
Specialised Applications
Most of us use AI services without being able to touch and feel them in real life.
However, with LTA’s trial of humanoid robot Olly and deployment of autonomous vehicles (AVs) in Punggol, this could change soon.
That said, mass adoption is key to the growth of this nascent space.
Until meaningful adoption gains traction, the execution risks remain significant for investors.
To ride the potential growth of this specialised applications space, consider ETFs like Global X Robotics & Artificial Intelligence ETF (BOTZ) that offers broad exposure to both industrial and non-industrial robots, as well as AVs powered by AI.
Get Smart: Building Your AI Future Without the Guesswork
While smart investors don’t always pick winning companies before everyone else, the good news is they don’t have to.
The reason?
They can simply stay exposed to broad AI growth themes through diversified ETFs.
The core infrastructural theme is a defensive pick-and-shovel play without having to pick the next winning AI model.
However, it’s susceptible to the risk of oversupply.
AI model and software businesses are generally asset-light, with minimal risk of oversupply, but they’re significantly exposed to technological disruption.
Specialised AI applications, like humanoid robotics, are novel and nascent.
While early exposure can be highly rewarding, without mass adoption, the execution risks are real.
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Disclosure: Larry L owns shares of NVIDIA, Broadcom, Marvell, ServiceNow, Microsoft, and Palantir.
