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 an investor favorite for its low-cost funds. The investment firm does not have purely AI-focused ETFs. However, here are three great Vanguard ETFs you can buy, packed with top AI stocks.
1. Vanguard Information Technology Index Fund ETF
The closest Vanguard can come to a pure AI fund is undoubtedly its Vanguard Information Technology Index Fund ETF (NYSEMKT: VGT)As the name suggests, this ETF focuses on information technology (IT) stocks.
The Vanguard Information Technology Index Fund ETF currently owns 321 US tech stocks. Five AI stocks make up almost 53% of the fund’s portfolio: Microsoft, Apple, Nvidia, BreedcomAnd Advanced micro devices.
You don’t have to pay through the nose for this ETF. The annual expense ratio is just 0.1% compared to an average expense ratio of 0.97% for comparable funds not offered by Vanguard.
Over the past 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 has been 13.25%.
The main drawback to buying this ETF is its valuation. The average shares in the fund have a price-earnings ratio (P/E) of 35.6. However, there is also good news. Shares of 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 skyrocketed. That means the Vanguard Mega Cap Growth Index Fund ETF (NYSEMKT: MGK) owns many AI leaders with a focus on the largest US growth stocks.
The Vanguard Mega Cap Growth Index Fund ETF holds 79 stocks with an average market cap of $1.8 trillion. Eight of the top 10 holdings are AI stocks: Microsoft, Apple, Nvidia, Amazon, Meta platforms, Alphabet Class A, Alphabet Class C and Tesla. These stocks make up almost 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 comparable funds. It has generated an average annual return of 20.03% over the past five years and 12.73% since the fund’s inception in December 2007.
However, like the Vanguard Information Technology Index Fund ETF, the Vanguard Mega Cap Growth Index Fund ETF has a high valuation. The average price-to-earnings ratio of the mega-cap stocks in the portfolio is 38.
3. Vanguard S&P 500 Growth Index Fund ETF
Investors looking for exposure to AI may also be interested in the Vanguard S&P 500 Growth Index Fund ETF (NYSEMKT: VOOG)This ETF owns growth stocks that are part of the S&P500 Table of contents.
This Vanguard ETF holds 229 stocks with a median market cap of $1.2 trillion. Nine of the 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 comparable funds. The ETF has delivered an average annual return of 16.59% over the past five years and 15.72% since its inception in September 2010. It is also the best-performing ETF in the Vanguard family so far through 2024.
You can probably guess what the main drawback of this Vanguard ETF is. It’s the same as the other two ETFs on our list: valuation. However, the Vanguard S&P 500 Growth Index Fund ETF is a bit cheaper, with a price-to-earnings ratio of 33.9. If the AI boom continues, this ETF should continue its blistering momentum.
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3 Great Vanguard ETFs to Buy That Are Loaded with Top AI (Artificial Intelligence) Stocks was originally published by The Motley Fool
