Investing in artificial intelligence, or AI, encompasses more than simply favoring the broader technology sector or cherry-picking individual stocks with AI involvement.
Opting for the broader sector might not yield the precise AI exposure investors are seeking. For instance, the Global Industry Classification System divides technology into three distinct groups: software and services, technology hardware and equipment, and semiconductors, each with further subdivisions into industries and sub-industries.
Without focusing on a specific industry group and accurately gauging its AI-related exposure through revenues or earnings, investors might end up with a broad portfolio that doesn’t truly reflect the pure-play AI theme they were aiming for.
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When it comes to individual AI stocks, company-specific risks become a significant factor. Although it might be simpler to assess how much of a company’s revenue stems from AI-related products and services, investing in single companies carries inherent risks.
This includes operational risks, such as issues in day-to-day business operations, and strategic risks, like incorrect business strategy decisions that could adversely affect a company. For AI companies, these risks might involve rapid technology obsolescence or specific regulatory challenges.
A balanced approach to achieving focused AI investment exposure is through thematic exchange-traded funds, or ETFs, that specialize in AI. These ETFs can either track niche indexes or follow proprietary actively managed strategies aimed at offering targeted AI exposure.
By investing in an AI ETF, investors can mitigate individual company risks while still capitalizing on the overall growth potential of ongoing 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,” says Tejas Dessai, assistant vice president and research analyst at Global X ETFs. “With a thematic ETF, you’re following an idea as opposed to a complex strategy.”
Here are six of the best AI ETFs to buy:
| ETF | Assets under management | Expense ratio |
| Global X Artificial Intelligence & Technology ETF (ticker: AIQ) | $1.7 billion | 0.68% |
| Global X Robotics & Artificial Intelligence ETF (BOTZ) | $2.8 billion | 0.68% |
| Invesco AI and Next Gen Software ETF (IGPT) | $283 million | 0.60% |
| Roundhill Generative AI & Technology ETF (CHAT) | $138 million | 0.75% |
| Amplify AI Powered Equity ETF (AIEQ) | $107 million | 0.75% |
| iShares Robotics and Artificial Intelligence Multisector ETF (IRBO) | $661 million | 0.47% |
Global X Artificial Intelligence & Technology ETF (AIQ)
“Trillions of dollars’ worth of chips will be up for replacement within data centers in the next few years to accommodate the rapid adoption of generative AI,” Dessai says. “This presents an exciting total addressable market for Nvidia Corp., and given their pole position in premium AI chips, we see them continue to own the lion’s share of the space by 2030.”
Unsurprisingly, the top holding in AIQ is currently Nvidia Corp. (NVDA) at 4.1%. However, the ETF also holds other AI players like Meta Platforms Inc. (META) and Amazon.com Inc. (AMZN). “AIQ offers a broad and comprehensive exposure to the entire AI value chain, with exposure that ends up looking quite like the Nasdaq 100 index but is more tilted toward technology and mid-cap growth,” Dessai says.
Global X Robotics & Artificial Intelligence ETF (BOTZ)
“Aside from AI processors, Nvidia’s broad stack — including its networking solutions — positions them quite attractively to monetize across the emerging computing stack,” Dessai says. “In addition to its hardware, Nvidia’s position is solidified by its CUDA platform, which allows AI developers to deploy workloads efficiently and work with clusters of GPUs.”
BOTZ provides investors with a more hardware-and-application-focused spin on AI investing, as opposed to AIQ’s more software-heavy focus. While Nvidia is still the top holding at 8.9%, the ETF also features companies deploying AI in health care and manufacturing, such as Intuitive Surgical Inc. (ISRG) and Yaskawa Electric Corp. (6506.T). “We see BOTZ as a more niche play on applied automation,” Dessai says.
Invesco AI and Next Gen Software ETF (IGPT)
“Looking ahead to 2024, we believe the AI trend will broaden in scope to encompass additional segments of the market, with new technological advancements, a more stable interest rate environment and the ongoing impact of fiscal stimulus broadening innovation across multiple industries,” says Rene Reyna, head of thematic and specialty product strategy at Invesco.
Invesco’s flagship AI ETF is IGPT, which charges a 0.6% expense ratio and includes Alphabet Inc. (GOOG, GOOGL), Meta, Nvidia and Advanced Micro Devices Inc. (AMD). “The index targets 100 companies from across the globe that generate revenue from various forms of software and artificial intelligence such as data storage, robotics, autonomous vehicles, semiconductors and web platforms,” Reyna says.
[READ: Is AI Investing a Winner-Take-All Game? 4 Stocks Competing for the Pie]
Roundhill Generative AI & Technology ETF (CHAT)
“Generative AI is the most exciting technological advancement in years, with the ability to transform how we live and work,” says David Mazza, chief strategy officer at Roundhill Investments. “We remain in the early stages of adoption and see investors starting to embrace the companies powering this trend.” For example, investors can currently gain exposure to ChatGPT creator OpenAI via Microsoft Corp. (MSFT).
Roundhill’s AI ETF, CHAT, currently holds MSFT as its second-largest holding behind Nvidia. Closely following are Alphabet, Meta and Adobe Inc. (ADBE). Unlike the previous ETFs, CHAT is actively managed, meaning that Roundhill does not follow an index. Instead, the ETF picks holdings based on Roundhill’s fundamental research. CHAT charges a 0.75% expense ratio.
Amplify AI Powered Equity ETF (AIEQ)
Another way investors can potentially benefit from AI is by picking an ETF like AIEQ, which uses AI for portfolio construction. “AIEQ leverages IBM Watson’s unparalleled machine learning and AI capabilities, analyzing over one million data points daily across various sources, to offer investors a sophisticated, AI-driven stock selection methodology,” says Christian Magoon, founder and CEO of Amplify ETFs.
This ETF tracks the AI Powered Equity Index for a 0.75% expense ratio. It is rebalanced monthly, with IBM Watson systematically analyzing financial statements, analyst reports, news and social media to determine optimal holdings and weightings for the ETF. Currently, the ETF’s largest sector weights are in energy, consumer discretionary and health care, deviating from the composition of the S&P 500.
iShares Robotics and Artificial Intelligence Multisector ETF (IRBO)
Many of the aforementioned ETFs charge high expense ratios, which over time can eat into returns. For example, AIQ and BOTZ charge 0.68% each, whereas the actively managed CHAT comes in higher at 0.75%. For a $10,000 investment in each of these ETFs, investors can expect to pay $68 and $75 annually in fees, respectively. For a cheaper alternative, consider IRBO, which charges a far lower 0.47% expense ratio.
This ETF passively tracks the NYSE FactSet Global Robotics and Artificial Intelligence Index, which deviates from the previous ETFs by using an equal-weighted methodology. As a result, each of IRBO’s 109 holdings are assigned an equal weight whenever the ETF rebalances. This can help investors sidestep concentration risk and gain exposure to smaller, up-and-coming AI players.
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6 of the Best AI ETFs to Buy Now originally appeared on usnews.com
Update 04/09/24: This story was previously published at an earlier date and has been updated with new information.
