If you want to profit from AI without picking individual AI stocks, these ETFs could be right up your alley.
How can you invest in artificial intelligence (AI) without having to pick specific AI stocks? It's simple: Buy an exchange-traded fund (ETF) with a heavy concentration in AI stocks.
Vanguard has long been a favorite with investors because of its low-cost funds. The investment firm doesn't have any purely AI-focused ETFs. However, here are three magnificent Vanguard ETFs to buy that are loaded with top AI stocks.
1. Vanguard Information Technology Index Fund ETF
Arguably, the closest thing Vanguard has to a pure play AI fund is its Vanguard Information Technology Index Fund ETF (VGT -0.59%). As its name indicates, this ETF focuses on information technology (IT) stocks.
The Vanguard Information Technology Index Fund ETF currently owns 321 U.S. tech stocks. Five AI stocks make up nearly 53% of the fund's portfolio: Microsoft, Apple, Nvidia, Broadcom, and Advanced Micro Devices.
You won't have to pay through the nose for this ETF. Its annual-expense ratio is only 0.1% compared to an average-expense ratio of 0.97% for similar funds not offered by Vanguard.
Over the last five years, the Vanguard Information Technology Index Fund ETF has delivered an average-annual return of 23.5%. Since its inception in January 2004, the ETF's average-annual return is 13.25%.
The primary downside of buying this ETF is its valuation. The average stock in the fund has a trailing price-to-earnings (P/E) ratio of 35.6. There is some good news, though. The stocks owned by this Vanguard ETF have generated average annual-earnings growth of 23% over the past five years. Many of them should have strong growth prospects going forward, which makes the ETF's valuation less scary.
2. Vanguard Mega Cap Growth Index Fund ETF
The market caps of the top AI stocks have soared. That means the Vanguard Mega Cap Growth Index Fund ETF (MGK -0.38%) owns many AI leaders with its focus on the largest U.S. growth stocks.
The Vanguard Mega Cap Growth Index Fund ETF owns 79 stocks with a median market cap of $1.8 trillion. Eight of its top-10 holdings are AI stocks: Microsoft, Apple, Nvidia, Amazon, Meta Platforms, Alphabet Class A, Alphabet Class C, and Tesla. These stocks make up nearly 60% of the ETF's portfolio.
This Vanguard ETF also has a low annual-expense ratio of 0.07%, well below the 0.95% average of similar funds. It has generated an average-annual return of 20.03% over the last five years and 12.73% since the fund's inception in December 2007.
Like the Vanguard Information Technology Index Fund ETF, though, the Vanguard Mega Cap Growth Index Fund ETF sports a lofty valuation. The average P/E ratio of the megacap stocks in its portfolio is 38.
3. Vanguard S&P 500 Growth Index Fund ETF
Investors seeking exposure to AI could also like the Vanguard S&P 500 Growth Index Fund ETF (VOOG -0.27%). This ETF owns growth stocks that are part of the S&P 500 index.
This Vanguard ETF owns 229 stocks with a median market cap of $1.2 trillion. Nine of its top-10 holdings are AI stocks: Microsoft, Apple, Nvidia, Amazon, Meta, Alphabet Class A, Alphabet Class C, Broadcom, and Tesla. These nine stocks make up 57.5% of the fund's total portfolio.
The Vanguard S&P 500 Growth Index Fund ETF's annual-expense ratio is 0.1%, much lower than the 0.95% average-expense ratio of similar funds. The ETF has delivered an average-annual return of 16.59% over the last five years and 15.72% since its inception in September 2010. It's also the best-performing ETF in the Vanguard family so far in 2024.
You can probably guess the primary drawback to this Vanguard ETF. It's the same as for the other two ETFs on our list -- valuation. However, the Vanguard S&P 500 Growth Index Fund ETF is a little cheaper with a P/E ratio of 33.9. If the AI boom continues, this ETF should keep its sizzling momentum going.
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. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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. Keith Speights has positions in Alphabet, Amazon, Apple, Meta Platforms, and Microsoft. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. 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.
