Investing in artificial intelligence (AI) stocks can be risky.Here's a great way

Artificial intelligence (AI) was a major theme in the stock market last year, and more and more companies are leveraging the technology.

according to goldman sachs36% of companies S&P500 Index mentioned AI on its investor conference call in the fourth quarter of 2023, up from 31% just three months earlier. Investor interest is very piqued, but as the playing field expands, it will become increasingly difficult to determine the winners and losers in the AI ​​race.

shares of NvidiaFor example, after surging nearly 240% in 2023, it has already soared more than 40% in 2024. Upstart HoldingsMeanwhile, after soaring 210% last year, it has plunged 32% so far this year. While AI is at the core of both companies, their businesses are very different and AI alone is not necessarily enough to drive investor enthusiasm.

But investors don't need a crystal ball to profit from the AI ​​revolution. Here's how to own a portfolio of AI stocks while limiting your exposure to inevitable failure.

Image source: Getty Images.

Exchange-traded funds offer the perfect balance of risk and reward

Rather than buying multiple individual AI stocks (which would require picking winners and losers), investors can buy an AI-focused exchange-traded fund (ETF). ETFs can hold hundreds of individual stocks and are managed by professionals who adjust the portfolio as needed.

Therefore, investors can benefit from the upside that the AI ​​industry brings while protecting themselves from companies that may fail. If past technology booms have taught us anything, it's that failures abound.

A number of AI ETFs have appeared on the market over the past few years, and here's why. iShares Robotics and Artificial Intelligence Multi-Sector ETF (IRBO -1.01%) and Global X Robotics & Artificial Intelligence ETF (Bots -0.50%) Two great options.

1. iShares Robotics and Artificial Intelligence Multi-Sector ETF (IRBO)

The goal of the IRBO ETF is to introduce investors to companies at the forefront of the AI ​​and robotics industry. It holds 111 stocks and securities from around the world, making it one of the most diverse options.

IRBO is also fairly evenly distributed compared to other AI ETFs. That's because its top 10 holdings represent just 13% of its total portfolio, and those top 10 stocks include some of the best AI stocks investors want to own.

Data source: iShares. Portfolio weights are accurate as of February 15, 2024 and are subject to change.

Semiconductor design company Arm Holdings ranks at the top of IRBO. The company's stock has already soared 60% in 2024, which is why it's significantly more heavily weighted in the ETF. IRBO also owns Nvidia and Advanced Micro Devices, two semiconductor giants in the AI ​​space.

IRBO also owns stakes in a number of companies that use AI to enhance their core businesses. For example, Meta Platforms uses AI to provide more relevant content recommendations to users on Facebook and Instagram. Music streaming platform Spotify is also used for similar purposes.

The IRBO ETF has delivered an 8% annual return since its inception (2018), which is lower than the S&P 500's average annual return of 10.2% since 1957. However, IRBO's one-year return is 36%, while IRBO's one-year return is 22%. S&P500.

I don't usually focus too much on a single year, but this just happened to be the time when AI really started to pick up steam. If stocks like Arm, Nvidia, AMD, and Meta Platforms continue to soar, it could help IRBO achieve market-beating returns.

2. Global X Robotics & Artificial Intelligence ETF (BOTZ)

Although the BOTZ ETF is similar in name and purpose to the IRBO, its composition is very different. It owns just 42 stocks and securities, so it's much more concentrated.

In fact, its top 10 holdings account for 70.6% of its total portfolio. Its largest holding, his Nvidia, accounts for almost 20%.

Data source: Global X. Portfolio weightings are accurate as of February 16, 2024 and are subject to change.

More than half of the BOTZ Top 10 stocks are listed outside the United States. For example, ABB Ltd is a Swiss engineering giant that develops hardware and software solutions for electrification and automation. Similarly, Japanese companies Keyence Corporation and Fanuc Corporation develop products and equipment needed to automate factories and manufacturing processes.

BOTZ also owns leading US-based companies such as Intuitive Surgical, which manufactures robotic products that improve clinical outcomes in the healthcare industry. Then there's his UiPath, which develops automation software. The stock has become a favorite of tech investor Cathie Wood.

ETFs that have a bias towards the top holdings can be a double-edged sword for investors. BOTZ has generated an average annual return of 9.85% since its inception (2016), which is better than his IRBO. It also beat both IRBO and the S&P 500 over the past year with a return of 38.6%.

However, if NVIDIA stock suffers a sharp decline, it could have a significant negative impact on returns since the company is a large part of the ETF.

As such, BOTZ may be a good choice for investors with a more aggressive risk profile, while IRBO may be a good choice for more conservative investors.