Thematic investing takes a targeted approach to the stock market, homing in on specific trends or ideas that transcend typical sector or industry classifications. It focuses on long-term potential rather than short-lived fads, making it an attractive strategy for forward-thinking investors.
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Take artificial intelligence as an example. While AI is a significant technological advancement, it doesn’t fit neatly into the traditional sectors as classified by the Global Industry Classification Standard (GICS).
The technology sector includes groups like software and services, and technology hardware and equipment, which are further divided into industries such as IT services, software, communications equipment and more.
However, these classifications don’t explicitly mention AI, even though many companies within these groups are deeply involved in AI development.
For investors keen on AI, the challenge is discerning which companies are heavily engaged in artificial intelligence through the broad GICS categories. This is where AI-themed ETFs come into play.
These funds utilize proprietary methodologies and indexes specifically designed to capture companies that are leaders in AI innovation, offering a more direct and concentrated exposure to this cutting-edge technology.
“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, director of thematic research 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 now:
| ETF | Expense Ratio |
| Xtrackers Artificial Intelligence and Big Data ETF (XAIX) | 0.35% |
| Roundhill Generative AI & Technology ETF (CHAT) | 0.75% |
| Invesco AI and Next Gen Software ETF (IGPT) | 0.60% |
| Global X Artificial Intelligence & Technology ETF (AIQ) | 0.68% |
| Global X Robotics & Artificial Intelligence ETF (BOTZ) | 0.68% |
| REX AI Equity Premium Income ETF (AIPI) | 0.65% |
Xtrackers Artificial Intelligence and Big Data ETF (XAIX)
“Many of the existing funds in the market utilize backward-looking mechanisms to determine if a company should be classified as an AI company,” says Arne Noack, regional investment head of Xtrackers, Americas, at DWS Group. Often, this involves screening a company’s historical revenues for AI-related sources, or quantifying their research and development spend on AI projects.
“On the other hand, XAIX’s approach seeks to be forward-looking, as its underlying index screens for approved patents in fields related to AI such as deep learning, image and speech recognition, and natural language processing, on a rolling one-year basis,” Noack notes. Today, the European version of XAIX, holding over $3.5 billion in assets, is now available to U.S. investors at a 0.35% expense ratio.
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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 Dave Mazza, CEO at Roundhill Investments. This branch of AI, often the most familiar to retail investors, includes notable examples such as OpenAI’s ChatGPT, Google’s DeepMind, and AI-driven content creation tools like DALL-E and Midjourney. For exposure, Roundhill offers CHAT.
“The ETF selects stocks using a proprietary methodology that combines a transcript score and sector score to evaluate companies’ relevance to generative AI, factoring in their revenue, profit and R&D investment in AI technologies,” Mazza explains. “Companies are then scored and selected based on their exposure to AI, market capitalization and liquidity.” CHAT charges a 0.75% expense ratio.
Invesco AI and Next Gen Software ETF (IGPT)
“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. The firm’s thematic AI ETF offering is IGPT at a 0.6% expense ratio.
This ETF tracks the STOXX World AC NexGen Software Development Index. “The index targets 100 companies from across the globe that generate revenue from various forms of software and AI, such as data storage, robotics, autonomous vehicles, semiconductors and web platforms,” Reyna says. Top holdings currently include Meta Platforms Inc. (META), Alphabet Inc. (GOOGL) and Nvidia Corp. (NVDA).
Global X Artificial Intelligence & Technology ETF (AIQ)
“AIQ offers a broad and comprehensive exposure to the entire AI value chain, with exposure that ends up looking quite like the Nasdaq-100 but is more tilted toward technology and mid-cap growth,” Dessai says. But unlike the Nasdaq-100, AIQ’s benchmark, the Indxx Artificial Intelligence & Big Data Index does not include non-AI related stocks like Costco Wholesale Corp. (COST) or PepsiCo. (PEP).
Instead, investors get a globally diversified portfolio of 84 companies, which includes the likes of Alibaba Group Holdings Ltd. (BABA), Oracle Corp. (ORCL), Meta Platforms, Cisco Systems Inc. (CSCO) and ServiceNow Inc. (NOW). This ETF also makes for an ideal tax-efficient holding as it pays a low 0.2% 30-day SEC yield. However, it is somewhat costly with a 0.68% expense ratio.
Global X Robotics & Artificial Intelligence ETF (BOTZ)
“We see BOTZ as a more niche play on applied automation,” Dessai says. Compared to AIQ, this ETF has less of a focus on the largest U.S. technology firms, and a markedly lower allocation to software developers. Instead, the focus of the ETF’s benchmark is on tech companies developing robotic and AI applications, and industrial and health care companies leveraging these solutions.
The Indxx Global Robotics & Artificial Intelligence Thematic Index tracked by BOTZ is significantly less U.S. centric compared to AIQ, with only 49% of the ETF’s portfolio being composed of American stocks. A large portion of this ETF, 31%, is actually allocated to Japanese stocks with a tilt toward the manufacturing sector. BOTZ charges the same 0.68% expense ratio as AIQ does.
REX AI Equity Premium Income ETF (AIPI)
AI companies often devote a significant portion of their free cash flow to research and development. While this can aid their growth prospects, it often results in below-average dividend yields paid to investors. But investors can synthetically create their own income stream from AI investments by selling covered call options, which cap upside but create yield. To delegate this to an ETF, consider AIPI.
“AIPI’s covered call strategy generates a considerable amount of income by selling call options on each of the individual holdings,” says Scott Acheychek, chief operating officer at REX Financial. “This provides a rare income source in a sector not typically associated with dividends.” AIPI currently pays a 34.8% distribution rate, based on its latest monthly payment annualized against its net asset value.
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6 of the Best AI ETFs to Buy Now originally appeared on usnews.com
Update 10/02/24: This story was previously published at an earlier date and has been updated with new information.
