You don’t need to own Nvidia directly to be all-in on artificial intelligence.

If you hold an S&P 500 index fund, a growth fund or a target-date fund, a big slice of your money already rides on the AI data center boom. For the past few years, that has worked out well.

The rising tide lifted almost every company in the supply chain, from chipmakers to the firms building new server farms. Investors barely had to tell the winners from the losers.

Now the water is getting choppier. Chip stocks fell more than 12% in July, and semiconductor and data center funds dropped 10.2% in October 1 through Oct. 16.

The natural move is to rotate into something that feels safer, like a value fund packed with old-economy companies. The catch is that this switch may not take you as far from AI as you think.

This warning comes from Vanguard. “Vanguard continues to believe that naively chasing the recent winners of the AI buildout creates a risk of buying high,” Andrew Shuman, director of research for Vanguard Oversight & Manager Search, wrote in commentary shared with TheStreet.

The note, titled “Navigating the AI hype cycle: A case for active,” was published on Vanguard’s website on Oct. 21.

Vanguard says “naively chasing the recent winners of the AI buildout creates a risk of buying high.”

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Why Vanguard says AI winners may be priced too high

Money has poured into the AI trade. Investors put nearly $82 billion into technology stocks in the 12 months through August 2026, Shuman wrote, citing Morningstar data.

That was more than three times the net inflows into industrials, the next-most-popular sector. Those inflows feed on themselves, pushing prices higher and pulling in more buyers.

Shuman also flagged the volatility that comes with chip stocks. “Given their cyclicality, semiconductor and semiconductor equipment stocks tend to have higher betas and volatility, often experiencing significant drawdowns,” he wrote.

Related: JPMorgan sends stark warning on AI stocks, cites dotcom worries

Vanguard sees history as a guide. A shift in market leadership “would echo prior technology cycles, from the buildout of railroads in the mid-19th century to 1990s broadband,” Shuman wrote.

In those cycles, the companies that laid the track or the cable rarely kept the biggest profits. The bigger winners were often the businesses built on top, such as e-commerce and social media companies after the internet buildout.

Your value fund may already own the AI giants

This is where your portfolio comes in. Vanguard says value stocks are “a natural first instinct” for investors who want to bet on old-economy companies that use AI to cut costs and lift margins.

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The problem is what else comes along for the ride. “Amazon and Microsoft, which are spending billions of dollars on AI data centers, are now two of the Russell 1000 Value Index’s three largest holdings,” Shuman wrote.

You can see it in the funds that track that index. The iShares Russell 1000 Value ETF (IWD) held Amazon at 6.12%, Apple at 6.11% and Microsoft at 5.26% as of Oct. 8, according to Stock Analysis.

In my analysis, that means roughly 17.5% of a fund many investors treat as a tech hedge sits in three of the biggest tech companies in the world. If you own a value fund to balance out an S&P 500 fund, check the top holdings before you assume you are diversified.

Vanguard adds a second caution. AI savings at old-economy companies “may or may not flow through to equity holders and stock prices,” Shuman wrote.

“In highly competitive industries where all participants can achieve similar savings using the same AI models, competition may result in passing those savings to customers through lower prices, rather than leading to higher margins,” he added.

The case Vanguard makes for active managers

Vanguard is best known for cheap index funds, so its argument here stands out. “Talented active managers, when accessed at reasonable costs, could prove their mettle in navigating this environment across both equities and fixed income,” Shuman wrote.

His reasoning is that the market is moving in two directions at once. “Dispersion within individual stocks has widened significantly despite historically normal levels of overall market volatility, creating an ideal backdrop for stock selection,” he wrote.

In plain terms, the overall index may look calm while the gap between individual winners and losers grows. That is the setting where picking stocks can pay off, at least in theory.

Here is what Vanguard says active managers should look for among the hyperscalers, the cloud giants spending heavily on AI data centers, according to the commentary:

• Companies with the best potential return on investment from products for both consumers, such as search and personal agents, and businesses, such as cloud computing.
• Companies that can deliver those products efficiently and at low cost.
• Companies that keep strong balance sheets as they tap public and private credit markets for capital.

Valuations already reflect some risk, Vanguard said, with hyperscalers trading at about 20 to 25 times expected earnings. Still, Shuman warned that the “trillions of dollars” going into AI data centers “could result in overcapacity that leads to broadly disappointing profits and stock returns.”

Why smaller companies could catch up

Vanguard also sees the AI playing field leveling out. As the cost of AI tokens falls, big budgets matter less, Shuman wrote.

“As costs decrease and the ability to experiment increases, value could accrue to smaller companies with more nimble cultures and management teams willing to disrupt their existing business models,” he wrote.

Vanguard also points to newer companies built on AI that are still private or carry only tiny weights in cap-weighted indexes. Shuman compared them to the e-commerce and mobile internet companies that “now sport multitrillion-dollar market capitalizations.”

What the odds say about active funds

Before you sell your index fund, look at the scorecard. About 67% of active large-cap U.S. stock funds trailed the S&P 500 in the first half of 2026, according to S&P Dow Jones Indices’ SPIVA report, as summarized by TKer.

Over 20 years, 93% fell short, according to the same summary. That is why Vanguard’s phrase “at reasonable costs” matters, because high fees are one of the main reasons active funds lag.

From my reading of the note, the practical takeaway is less about firing your index fund and more about knowing what it owns. You may hold far more AI exposure than your fund labels suggest.

Vanguard’s bet is on the next generation. “Active managers able to identify the Amazons and Googles of the 2030s may be well positioned to deliver attractive returns to their shareholders,” Shuman wrote.

Related: Jim Cramer issues stark warning after AI stocks get crushed