Broadcom-OpenAI Deal Boosts AI Growth Prospects: Tech ETFs in Focus

ChatGPT developer OpenAI recently signed a contract with yet another renowned chipmaker, Broadcom (AVGO), in its latest bid to power data centers in support of the rapidly growing artificial intelligence (AI) demand. This multi-year contract, aimed at deploying 10 gigawatts of custom AI accelerators, marks the fourth such mega deal signed by OpenAI this year with chipmakers. It further underscores the fact that the AI boom is firmly entrenched.

For investors, this continued momentum offers the advantage of keeping AI-focused Tech Exchange-Traded Funds (ETFs) in their portfolio to capture the underlying growth while mitigating the unique risks of betting on any single company.

Does the AI Boom Have Room to Run?

The overall market sentiment for the AI boom is currently mixed. While there is widespread speculation of an “AI bubble burst” to happen soon, with growing market consensus in favor of the burst coming from some industry experts and economists, others remain optimistic about the immediate future of AI.

Evidently, veteran economist Steve Hanke has compared the AI boom with the dot-com bubble (as per a Business Insider report cited in Yahoo Finance), implying it might collapse soon, while Goldman Sachs' chief global equity strategist states that current technology valuations are stretched but not at historical bubble levels (as per a report by Barron’s).

In favor of the market optimism for AI’s future, chief economist of Allianz, Ludovic Subran, has described the current market as "less a bubble and more of a boom underpinned by fundamentals" (stated in a September report of the World Economic Forum).

OpenAI’s relentless pace of mega-deals valued at nearly more than $1 trillion in potential capacity spending further backs this optimism. It implies that the race for AI supremacy is an industrial undertaking, not a speculative fad.

However, there is no denying that the demand for AI does not come without underlying risks. One such risk is the concentration of capital power in the pockets of a handful of mega-cap technology companies, including the “Magnificent Seven.” Practically, these are the companies that have been pushing the AI-led growth in the economy. The huge gap between these tech biggies and the rest of the industry leaves markets vulnerable during times of crisis. Any disruption in any of these companies’ investment capacity bears the potential to create a ripple effect across both tech and adjacent sectors, causing huge losses for investors.

So, even those who believe in AI’s growth potential and do not foresee any AI bubble burst soon have advised market participants to remain cautious of the present market situation.

Navigating the Risks: Why ETFs Offer a Smoother Path

Apart from the AI-industry specific risks and skepticism surrounding it, broader economic concerns in the form of a potential recession fear and the impact of tariffs persist. Additionally, a fresh trade tension between the United States and China, which has erupted over the past weekend amid the uncertainties of the ongoing government shutdown, might cloud the decision-making power of individual investors.

Amid this backdrop, concentrating an investment in a single AI stock can be risky for investors seeking growth from the technology sector’s rally. This is where AI-focused Tech ETFs provide a strategic protective shield. By holding a diversified basket of companies involved in AI, they spread the risk. A downturn for one company is buffered by the others in the fund, mitigating the impact of a sudden downfall in any single stock.

Tech ETFs to Watch

The following Technology ETFs come with heavy exposure in AI-centric companies, particularly the Magnificent Seven, which includes Alphabet (GOOG), Amazon (AMZN), Apple (AAPL), Broadcom, Meta Platforms (META), Microsoft (MSFT), and NVIDIA (NVDA).

iShares U.S. Technology ETF (IYW)

This fund offers exposure to U.S. companies from the electronics, computer software and hardware, and information technology industries. Its top five holdings include NVIDIA (16.70%), Microsoft (14.81%), Apple (14.02%), Meta Platforms (3.40%) and Broadcom (3.23%).

IYW has risen 23.7% in the year-to-date period. The fund charges 38 basis points (bps) as fees.

Fidelity MSCI Information Technology Index ETF (FTEC)

This fund provides exposure to U.S. information technology companies. Its top five holdings include NVDA (16.83%), AAPL (13.42%), MSFT (13.09%), AVGO (4.47%) and Oracle (2.37%), another renowned chipmaker.

FTEC has gained 21.8% in the year-to-date period. The fund charges 8 bps as fees.

Roundhill Generative AI & Technology ETF (CHAT)

This fund offers exposure to companies involved in the investment theme of artificial intelligence, generative artificial intelligence and related technologies. Its top five holdings include NVDA (7.99%), GOOG (5.48%), Oracle (4.47%), MSFT (3.77%) and META (3.72%).

CHAT has risen 58.3% in the year-to-date period. The fund charges 75 bps as fees.

Roundhill Magnificent Seven ETF (MAGS)

This fund provides exposure to the magnificent seven companies. Its top five holdings include NVDA (15.11%), MSFT (14.47%), AMZN (14.28%) and AAPL (13.95%).

MAGS has risen 18% in the year-to-date period. The fund charges 29 bps as fees.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research