Artificial intelligence (AI) is the trade of the decade. It turned NVIDIA (NASDAQ: NVDA) into a household name. But the AI trade goes beyond NVIDIA. Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOGL), and Meta Platforms (NASDAQ: META) have reoriented their entire capital expenditure stories around AI infrastructure.
However, the S&P 500 has become so top-heavy with mega-caps that passive index investing now carries more concentration risk than many retail investors realize. In fact, at this point, if investors own the index through a vehicle like The SPDR S&P 500 ETF Trust (NYSEARCA: SPY), they already have significant AI exposure. The question is whether that exposure is intentional, diversified, and sized appropriately for individual investors’ risk tolerance.
Here are some ideas regarding what a practical AI playbook could look like
But First, Understand Any Current Exposure
Before buying anything with "AI" in the name, it’s important to understand how much exposure may exist from index funds. For example, the SPY ETF has roughly 30% invested in the six companies that dominate AI headlines.
This isn’t a critique of the approach; it’s just math. Many index funds are market-cap weighted, meaning the bigger the company, the more of your dollar it consumes. That means, in recent years, the Magnificent 7 stocks collectively represent a historic share of the index. If AI stumbles, a "diversified" index fund will feel it.
This means any additional AI exposure should be a complement, not a substitute, and sized accordingly. A reasonable framework that many financial professionals recommend for most investors is to treat dedicated AI positions as satellite holdings around a core index, capping thematic exposure at 10% to 15% of total equity allocation.
The Infrastructure Layer
For direct, high-conviction exposure to AI's build-out phase, the infrastructure layer is the clearest bet. Someone has to manufacture the chips, and right now, NVIDIA's Blackwell GPUs are the dominant substrate on which the entire AI boom runs.
The risk is well-known: NVDA trades at a premium that prices in years of continued dominance. A single disappointing earnings print or a credible competitor could move the stock violently.
Broadcom (NASDAQ: AVGO) is another popular choice. Its custom AI chip business, built around hyperscaler partnerships, offers a different angle on the same infrastructure theme, with slightly less valuation froth and a more diversified revenue base that includes networking and enterprise software. Neither of the two is a "safe" stock, but for an investor who wants genuine picks-and-shovels exposure, one of these two belongs in the conversation.
A Diversified AI Beneficiary
Microsoft is the least exciting pick on this list, but this is one time when boring and predictable can be profitable.
Its enterprise AI strategy, which is built around its Azure cloud platform and its deep integration of Copilot across the Office suite, gives it something NVIDIA doesn't have: a recurring revenue model that doesn't depend on any single customer's capital expenditure cycle. Enterprises are slow to change productivity software. That stickiness is valuable.
Microsoft also gives retail investors exposure to OpenAI's commercial trajectory without having to access private markets. The relationship is complicated, and the financials are partially opaque, but the strategic alignment is real.
As of this writing, Microsoft has an attractive valuation relative to its earnings growth. For investors seeking AI exposure that can withstand a sector-wide correction without going to zero, MSFT can be a quality anchor.
The ETF Question—Diversification or Illusion?
Thematic AI ETFs have exploded in number. Products like the Roundhill Generative AI & Technology ETF (NYSEARCA: CHAT) pitch themselves as one-stop AI exposure. The pitch is partially true but can be misleading.
The honest assessment: most AI ETFs are highly correlated with the Nasdaq 100 and with each other. Pull up their top 10 holdings, and you'll find the same names that you already own through your index fund. The "diversification" you're buying is often a repackaging of mega-cap exposure with a thematic label and a higher expense ratio.
Where ETFs genuinely add value is in accessing the mid-cap and international AI layer that's harder to research and trade individually. Companies like ASML Holding (NASDAQ: ASML)—the monopoly supplier of the lithography machines that make advanced chips possible—or Japanese robotics plays are real diversifiers. A well-constructed thematic ETF that reaches into this tier is doing something an index fund isn't.
How Retail Investors Can Build a Smarter AI Portfolio
This earnings season should have put to rest the idea that AI is in a bubble. However, it won’t be a sure thing for every stock. It's both a genuine technological shift and an overcrowded trade simultaneously.
The investors who will come out ahead are the ones who get exposure with intention: knowing what they own, why they own it, and how much pain they can tolerate if the timeline stretches or the narrative cracks.
For those with a higher risk appetite, the AI trade has a momentum layer worth understanding, even if it isn't the core of a long-term position. Memory stocks like Micron Technology (NASDAQ: MU) have become AI proxies, driven by surging demand for high-bandwidth memory in GPU clusters,
On the energy side, companies like Vertiv (NYSE: VRT), which supplies the power and cooling infrastructure that AI data centers require around the clock, have emerged as momentum plays, with valuations that reflect genuine demand growth but also a great deal of optimism already baked in.
The practical framework, then, looks something like this: one infrastructure name, one quality compounder, a careful look at whether the ETF on the watchlist is actually diversifying or just repackaging the same mega-cap exposure. And for investors who are active enough to manage it, a small, disciplined allocation to momentum names like MU or VRT that captures the AI trade's more speculative edge without letting it define the portfolio.
The article "The Smarter Way to Invest in AI Without Taking Extreme Risk" first appeared on MarketBeat.
