Billionaires are selling Palantir shares and buying a powerful index fund for the artificial intelligence (AI) boom.

Palantir Shares are up 285% year to date on encouraging financial results and growing excitement about its position in the artificial intelligence economy. However, the billionaire-run hedge funds listed below sold Palantir shares in the third quarter while simultaneously buying shares of Vanguard Information Technology ETF (VGT -1.03%).

• Ken Griffin’s Citadel Advisors sold 5.1 million shares of Palantir, reducing its stake by 91%. The hedge fund purchased 14,521 shares of the Vanguard Information Technology ETF, increasing its position by 3,178%.
• Israel Englander’s Millennium Management sold 4.4 million shares of Palantir, reducing its stake by 90%. The hedge fund bought 2,388 shares of the Vanguard Information Technology ETF, opening a small position.
• David Shaw’s DE Shaw sold 8.7 million shares of Palantir, reducing his stake by 45%. The hedge fund added 12,259 shares of the Vanguard Information Technology ETF, opening a small position.

While Palantir has been a worthwhile investment, Wall Street is worried about its valuation. Among the 20 analysts who follow the company, the median price target is $38 per share. That represents a 42% decline from the current share price of $66. Even the highest price target of $57 per share implies a downside potential of 14%.

That could explain why the aforementioned fund managers turned away from Palantir in the third quarter. Regardless, the Vanguard Information Technology ETF offers exposure to the artificial intelligence boom with (arguably) lower risk of a decline of more than 40%.

The technology sector has consistently beaten the S&P 500

The S&P 500 is widely considered the best indicator of the entire US stock market. It includes 500 large companies covering all 11 stock market sectors, but a single sector has been responsible for much of its rise in recent years. “The technology sector has generated 32% of global equity returns and 40% of U.S. stock market returns since 2010,” it said Goldman Sachs.

The graphic below further illustrates this point. It compares the total return of the technology sector with the total return of the S&P 500 over various time periods.

Source: YCharts.

Importantly, while valuations across the technology sector are high, the companies involved are on very solid financial footing. “Earnings per share for the global technology sector are up about 400% from their peak before the Great Financial Crisis, while all other sectors combined are up 25% over that period,” according to Goldman Sachs.

The Vanguard Information Technology ETF offers exposure to artificial intelligence stocks

The Vanguard Information Technology ETF tracks the performance of 314 technology companies that fall into four categories: chipmakers and semiconductor equipment makers, cloud service providers, software providers, and hardware and equipment manufacturers. Below are the index fund’s five largest holdings by weight:

1. Apple: 15.7%
2. Nvidia: 15.4%
3. Microsoft: 13.3%
4. Broadcom: 4.5%
5. Salesforce: 1.8%

Importantly, each of the companies mentioned above benefits from artificial intelligence (AI). Apple recently unveiled Apple Intelligence, a suite of AI features for its iPhones and MacBooks. Nvidia GPUs are the gold standard in data center accelerators. Microsoft has expanded its office software to include generative AI copilots. Broadcom is the leading provider of custom AI accelerators. Salesforce has also added AI capabilities to its CRM software.

Here’s the bottom line: The Vanguard Information Technology ETF offers diversified exposure to the only stock market sector that has consistently outperformed the broader S&P 500 over the last one, three, five and 10 years. And that outperformance could continue if the AI boom unfolds in the coming years.

Additionally, the Vanguard Information ETF has a reasonable expense ratio of 0.10%, meaning investors pay $1 annually for every $1,000 invested in the fund. In comparison, the average expense ratio for similar funds is 0.95%, according to Vanguard. Of course, volatility is a hallmark of technology stocks, but investors comfortable with that prospect should consider buying a small position in this index fund today.