As the development of artificial intelligence (AI) systems continues at a breakneck pace, this emerging technology is poised to disrupt the global economy and transform entire industries. This revolution is sure to create winners and losers, and companies that fail to adapt will be left behind.
Therefore, Vanguard Total Stock Market Index Fund ETF (NYSE:MKT:VTI) It may not be the best choice for investors today.
The disruptive potential of AI and its impact on the economy
AI has the potential to disrupt nearly every economic sector, industry, and sub-industry, from healthcare and finance to manufacturing and transportation. As AI-powered software systems and robots become part of everyday life, it will fundamentally change the way businesses operate. Companies that best use AI to increase efficiencies, reduce costs, and create new products and services will gain a significant competitive advantage.
But this disruptive potential also brings great risks for companies that aren’t well-suited for this next stage in the technology’s evolution. For example, companies in traditional industries such as retail, various forms of insurance, and fossil fuels may struggle to keep up with the rapid changes brought about by AI. Many companies could become obsolete, leading to job losses and economic dislocation.
Rethinking Diversification: The Limitations of Broad Index Funds in the Age of AI
Given the transformative potential of AI, investors may want to reconsider their allocations to broad index funds like the Vanguard Total Stock Market Index Fund ETF. While this popular fund offers exposure to more than 3,700 U.S. companies across all economic sectors, it may not be the best choice in the AI era.
Meanwhile, the Vanguard Total Stock Market Index Fund ETF is heavily biased towards information technology stocks: Weighted by market cap, eight of its top 10 holdings are AI-related stocks. Microsoft, NVIDIA, apple (Nasdaq: AAPL), Amazon (Nasdaq: AMZN)and alphabet.
However, the remaining holdings, around 71% are spread across various sectors, some of which may face significant challenges in adapting to this new technological environment.
Given that technology dominates most aspects of our daily lives and has the potential to rebalance the global order, investors may need to reconsider the benefits of the broad diversification inherent in funds like the Vanguard Total Stock Market Index Fund ETF.
Why? Even though many technology executives and experts in the field have publicly warned the world about the impending changes that will occur over the next two to three years, distrust persists among the general public.
This sentiment is likely to change this fall with the release of the next version of OpenAI’s ChatGPT, the announcement of Apple Intelligence, and the launch of Amazon’s Alexa Plus. Indeed, Apple Intelligence will be a show-stopping moment for most people due to the popularity of the company’s iconic iPhone. And the emergence of relatively affordable, advanced robotic systems soon after will only add fuel to the fire.
As the AI revolution progresses, investors may want to take a more targeted approach to portfolio construction, focusing on companies and sectors that are built to thrive in this new era. While broad-based index funds have served investors well to date, in the age of AI, a greater concentration in technology and technology-related areas may be justified.
Capitalizing on the AI revolution with tech-driven ETFs
Technology-oriented exchange-traded funds (ETFs) Invesco QQQ Trust (Nasdaq: QQQ), Vanguard Growth ETF (NYSE:MKT: VUG)or Vanguard Information Technology ETF (NYSE:MKT:VGT) This would be an ideal way to take advantage of this trend.
Invesco QQQ is Nasdaq 100 The index provides exposure to many of the leading technology companies at the forefront of AI.
The Vanguard Growth ETF focuses on large U.S. growth stocks and includes a number of those companies in its portfolio, but it boasts a broader mix of assets than the Invesco QQQ.
For investors looking for a highly concentrated technology fund, the Vanguard Information Technology ETF may be an attractive option, with Microsoft, Apple and NVIDIA making up about 46% of the portfolio as of this writing.
As the AI era advances, investors may want to consider reducing their exposure to the overall market and increasing their allocations to these and similar technology-oriented ETFs. These funds focus their investments on companies that stand to benefit most from AI, making them attractive growth and hedging vehicles as the era of super-smart machines arrives.
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Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of The Motley Fool’s board of directors. George Budwell owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet, Amazon, Apple, Microsoft, Nvidia, Vanguard Index Funds-Vanguard Growth ETF, and Vanguard Index Funds-Vanguard Total Stock Market ETF. The Motley Fool recommends buying Microsoft’s January 2026 $395 calls and selling Microsoft’s January 2026 $405 calls. The Motley Fool has a disclosure policy.
Why the Vanguard Total Stock Market Index Fund ETF isn’t suitable for the AI era was originally published by The Motley Fool.
