A CIO flags a lesser-known ETF that offers an edge over the broader market

People walk by the New York Stock Exchange

The S&P 500 has long been the go-to for investors to buy broad market exposure to large-cap US stocks, but one chief investment officer overseeing $40 billion argues the benchmark index might be a bit out of date.

That’s because the S&P 500 only offers exposure to US stocks, while leaving investors without a way to partake in the upside of some top international companies, some of which are at the forefront of the AI trade, said Will McGough, CIO at Prime Capital Financial.

A better catch-all index to invest in, he said, would be the S&P Global 100, which tracks a selection of around 100 top stocks in the world by market cap. A popular fund that tracks the index is the iShares Global 100 ETF (IOO).

The fund has about 80% exposure to the US stocks, but also includes key non-US AI holdings like South Korean memory chip maker Samsung Electronics; Dutch lithography machine producer ASML; SAP, a German software company building custom AI tools for businesses; and French energy firm Schneider Electric, which is helping to buildout data center infrastructure.

Other prominent international firms tied to AI included in the fund include Sony, Siemens, and Tencent.

Since today’s global economy is so intertwined, particularly for companies tied to the AI boom, the old regional and factor buckets for stocks don’t make as much sense anymore, McGough said.

“IOO makes a lot of sense to me because you’re kind of cutting through people’s predetermined definitions of what’s growth, what’s value, what’s developed, what’s emerging,” McGough told Business Insider. “You’re really just going with the theme of: the larger companies by market cap are in dominant positions with regard to their ability to grow earnings faster than some of the smaller stocks.”

In addition to global AI firms being closely tied to other multinational firms, blurring the lines of regional classifications, McGough highlighted definitions of factors like value as another example of this way of investing being outdated. For instance, the S&P 500 Value Index has large weightings in Apple, Amazon, and Tesla, which are historically viewed as growth stocks.

“If you try to overweight growth by using growth ETFs, you’re missing some growth names that are in the value index,” he said.

One concern an investor might have with IOO is that it’s heavily tilted toward the tech sector with a 45% weighting. That’s even more biased than the S&P 500’s 37% sector weighting. This makes it particularly vulnerable to a pullback in AI stocks if investors suddenly sour on the theme.

But McGough said he wasn’t concerned about that, arguing that the AI trade still has legs as capex rises and the data center buildout continues. He said the trade is probably in its fourth inning, implying it’s less than halfway played out.

Further, being out of the AI trade means you risk underperforming, he said, and exposure to the theme is now simply a natural byproduct of owning the largest companies in the world.

With around $8 billion in assets under management, IOO is a much smaller fund than S&P 500 funds like the Vanguard S&P 500 ETF (VOO), with $990 billion, and the SPDR S&P 500 ETF Trust (SPY), with $789 billion. IOO charges an annual expense ratio of 0.04%.

While IOO has exposure to many top international stocks involved in the AI trade, it its missing some notable names like Taiwan Semiconductor and SK Hynix.

Here are its top 10 holdings and their weightings: