OpenAI’s launch of its artificial intelligence, or AI, chatbot ChatGPT in November was met with critical acclaim and a flurry of public attention. Within days, people around the world were using the free application for everything from writing essays to taking tests and even generating code.
The hype around ChatGPT caught the attention of institutions, too, with Microsoft Corp. (ticker: MSFT) announcing a multibillion-dollar investment into OpenAI in a January press release. Nearly three months later, Alphabet Inc. (GOOG, GOOGL) would escalate the AI arms race by releasing its experimental AI service, Bard, to the general public.
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“We’re clearly entering the golden era of AI with Big Tech making this shift a priority across their ventures,” says Tejas Dessai, research analyst at Global X ETFs.
Sean August, CEO at The August Wealth Management Group, agrees: “The AI industry has seen significant growth in recent years, driven by advances in machine learning algorithms, big data analytics and the increasing computing power.”
Some experts remain highly bullish on overall growth prospects, too, given the rapid pace of advancements recently. “We expect the AI market to reach over half a trillion dollars in value by 2024 even amid slowdown in venture capital funding, as organizations across various sectors adopt AI to enhance efficiency, cut costs and enhance customer experiences,” Dessai says.
The attempts by Big Tech to capitalize on momentum in the AI space have also caught the attention of investors, many of whom believe AI to be the next big theme in tech sector investing. However, investing in AI can be difficult at this early stage.
“It can be difficult to get exposure to pure-play AI companies because this is a relatively new technology,” says John Cunnison, vice president and chief investment officer of Baker Boyer Bank. “Most new, innovative AI companies are small and funded by private capital and are not publicly traded.”
Therefore, a proxy might be an AI-centered thematic exchange-traded fund, or ETF, that attempts to capture the returns of companies that develop or deploy AI, or benefit directly from AI development.
“We’re in the early stages of the AI cycle, and proper diversification is extremely important, be it across company stages or geographies, because it’s difficult to pick a winner or two this early,” Dessai says. “With a thematic ETF, you’re following an idea as opposed to a complex strategy.”
Here’s a look at six AI ETFs that either offer exposure to AI companies or use AI for their investment strategy:
| ETF | Expense ratio |
| Global X Artificial Intelligence & Technology ETF (AIQ) | 0.68% |
| Global X Robotics & Artificial Intelligence ETF (BOTZ) | 0.69% |
| First Trust Nasdaq Artificial Intelligence and Robotics ETF (ROBT) | 0.65% |
| iShares Exponential Technologies ETF (XT) | 0.46% |
| Ark Autonomous Technology & Robotics ETF (ARKQ) | 0.75% |
| ETFMG AI Powered Equity ETF (AIEQ) | 0.75% |
Global X Artificial Intelligence & Technology ETF (AIQ)
“We’re extremely bullish on the technological paradigm of AI,” Dessai says. “We’re already seeing a flurry of applications emerge across the board, which may drive more spending on software, hardware, processors and storage, which is vital to tech industry growth.”
For a broad AI play, investors can buy AIQ, which tracks the Indxx Artificial Intelligence & Big Data Index.
The top holdings in AIQ include familiar Big Tech names like Meta Platforms Inc. (META), Nvidia Corp. (NVDA), Tesla Inc. (TSLA), Microsoft, Alphabet and Apple Inc. (AAPL). These companies all stand to either develop or use AI further in their products and services, and tend to be less risky investments than up-and-coming small-cap AI stocks. AIQ charges a 0.68% expense ratio, or $68 a year on a $10,000 investment.
Global X Robotics & Artificial Intelligence ETF (BOTZ)
AI and robotics go hand-in-hand, with the former helping power advancements and expanded features in the latter. To capitalize on both trends, investors can buy BOTZ, which tracks the Indxx Global Robotics & Artificial Intelligence Thematic Index. This ETF holds a wide range of companies involved not only in AI, but also industrial robotics, automation and autonomous driving for a 0.69% expense ratio.
Notable in BOTZ is a higher allocation to industrial and health care companies at 34.7% and 14.8%, respectively, highlighting the increased application of AI and robotics in those sectors. “I believe AI has the potential to transform health care, transportation and manufacturing industries, and we can expect continued growth driven by increasing demand for AI-powered solutions,” August says.
First Trust Nasdaq Artificial Intelligence and Robotics ETF (ROBT)
Cunnison points out some of the shortcomings of some AI ETFs, noting: “Many of these thematic ETFs will essentially be closet growth index funds — they come with the expense ratio of an actively managed fund, but they are essentially invested in all the major tech companies.”
“For these large tech companies, AI is a growing, but still small, part of their current business,” he says.
An alternative here is ROBT, which tracks the Nasdaq CTA Artificial Intelligence and Robotics Index. ROBT uses a stricter set of criteria from the Consumer Technology Association to identify companies that qualify as AI or robotics “enablers, engagers or enhancers.” Its portfolio has much less Big Tech exposure than BOTZ or AIQ. ROBT charges a 0.65% expense ratio.
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iShares Exponential Technologies ETF (XT)
“If you invest in a broadly diversified stock portfolio, you already have some exposure to AI,” Cunnison says. “Your exposure can either be direct in companies that are primarily developing AI solutions, or it can be indirect in companies that are leveraging AI services to make their products and services better, faster, cheaper and more profitably.”
For a broader bet, investors can buy XT, which currently holds 197 global tech companies tracked by the Morningstar Exponential Technologies Index. The ETF tracks nine themes, with notable ones like cloud computing, robotics and big data analytics that are expected to benefit from advancements in AI. In terms of fees, XT also comes in lower than the previous options at a 0.46% expense ratio.
Ark Autonomous Technology & Robotics ETF (ARKQ)
For an actively managed approach to AI investing, investors can buy ARKQ. While not a pure-play ETF, ARKQ focuses on quite a few industries where AI is expected to have an impact, such as autonomous transportation, robotics and automation. Because the ETF isn’t bound to an index, the management team is free to swap stocks as they see fit based on their own outlook and research.
Given that ARKQ has a forward-looking growth focus, it’s possible that the ETF will identify AI stocks as an emerging theme to add to its portfolio in the near future. In 2020, ARKQ experienced strong returns after capitalizing on explosive growth in the electric vehicle industry, largely thanks to its holdings in Tesla. The ETF charges a higher 0.75% expense ratio.
ETFMG AI Powered Equity ETF (AIEQ)
For a meta approach to investing that marries AI with finance, investors can buy AIEQ. “AIEQ applies IBM Watson and other AI tools to select 150 stocks with the highest probability of market appreciation over the next 12 months,” says Chris Natividad, chief investment officer at EquBot. “We believe the fund has its best days ahead as it continues to learn from every trade.”
According to its fact sheet, the AI behind AIEQ is capable of analyzing millions of data points across news, social media, analyst reports and financial statements to create and manage its portfolio. The ETF assigns scores to a company based on a variety of factors to emulate the work of human equity analysts, with less potential for biases and errors. AIEQ charges a 0.75% expense ratio.
Risks and Limitations of AI ETFs
The AI industry is nascent, so it’s important for prospective investors to remain aware of numerous possible risks and limitations before investing.
In terms of risks, August identifies three: regulatory, technological and market. “Regulatory risks arise from potential changes in government AI policies, while technological risks arise from the possibility of AI malfunctioning or failing,” August says. “Market risks arise from changes in investor sentiment toward the AI industry, which can lead to losses in AI-related investments.”
Some experts also criticize the limitations of existing AI-themed ETFs, especially when it comes to a potential lack of meaningful exposure to pure-play up-and-coming AI companies.
“If you look at the biggest ETFs that purportedly focus on ‘investing in AI,’ their largest holdings are companies that focus on lasers, companies that make semiconductor chips and companies that provide software for automated storage or tracking fleets of vehicles,” says Christopher Manske, founder and president of Manske Wealth Management.
Christopher Conway, senior portfolio manager at GYL Financial Synergies, agrees with Manske, noting: “If you look at the holdings of the largest AI ETFs, it’s not always clear how AI will definitely benefit these companies, and whether the AI services of these respective stocks will lead to more differentiated products or better competitive positions for the companies in general.”
As it stands, AI is a very niche and underdeveloped industry in the overall tech sector, which can also expose it to higher volatility than the broad market. “A concentrated bet on AI, as opposed to a more generalized bet on tech companies, means that future returns and risk will differ meaningfully from the market,” Cunnison says. “Investors need to prepare themselves for potentially high downside volatility and size their position appropriately.”
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6 of the Best AI ETFs to Buy for 2023 originally appeared on usnews.com
Update 06/08/23: This story was previously published at an earlier date and has been updated with new information.
