Artificial intelligence investing can be as volatile as it is promising, largely due to the intense competition and rapid pace of innovation within the industry.
For example, the fortunes of AI companies can swing dramatically with new product launches or earnings reports. Consider the recent plight of chipmaker Intel Corp. (ticker: INTC), which was recently booted from the Dow Jones Industrial Average after sustained poor performance.
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To manage these risks, diversification becomes crucial. Imagine you own shares in just three AI companies, and one of them sees its value halve. That could potentially lead to a significant reduction in your portfolio’s overall value.
However, if you were invested in a diversified basket of, say, 50 AI-themed companies and one of those, which made up just 5% of your portfolio, fell by 50%, the impact on your entire portfolio would be much more contained.
While diversifying can limit potential upside, the asymmetry of losses makes it a prudent strategy in the long run. For instance, recovering from a 10% loss requires an 11% gain, a 25% loss requires a 33% gain, and a 50% loss requires a whopping 100% gain to break even.
Thus, in growth-driven investing like AI, managing risk often proves more critical than chasing high returns. Fortunately, you don’t have to individually identify, screen and purchase dozens of AI stocks.
AI exchange-traded funds, or ETFs, offer a convenient way to invest in a broad array of AI companies through a single transaction, whether following an index or using an active management approach.
“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% |
| 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% |
| Roundhill Generative AI & Technology ETF (CHAT) | 0.75% |
| iShares Future AI & Tech ETF (ARTY) | 0.47% |
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. “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.”
The Nasdaq Global Artificial Intelligence and Big Data Index tracked by XAIX screens patents for machine learning, image and speech recognition, and natural language processing themes on a rolling one-year basis. The current portfolio includes 88 holdings such as Meta Platforms Inc. (META), Nvidia Corp. (NVDA), Apple Inc. (AAPL) and Amazon.com Inc. (AMZN). XAIX charges a 0.35% 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 ETF strategy at Invesco. For AI exposure, Invesco offers IGPT at a 0.60% expense ratio.
IGPT tracks the STOXX World AC NexGen Software Development Index, which spans the technology, consumer discretionary, health care and communications sectors. “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.
Global X Artificial Intelligence & Technology ETF (AIQ)
The Nasdaq-100 Index is a popular pick for investors seeking exposure to America’s largest tech companies, but it comes with a catch — it’s not actually a pure-play technology benchmark. In fact, by buying Nasdaq-100 tracking ETFs, you also get exposure to some decidedly non-AI consumer staples giants, such as Costco Wholesale Corp. (COST) or PepsiCo. (PEP). An alternative to consider is 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. Top holdings in this ETF include Cisco Systems Inc. (CSCO), Oracle Corp. (ORCL), Netflix Inc. (NFLX), Meta Platforms and Nvidia. The ETF charges a 0.68% expense ratio.
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Global X Robotics & Artificial Intelligence ETF (BOTZ)
One of the most exciting applications of AI today is its integration with robotics. For example, consider Spot, Boston Dynamics’ robot dog. By integrating open-source large language models, or LLMs, Spot is now able to respond to verbal prompts, communicate with text-to-speech capabilities, and engage more actively with external stimuli. However, Boston Dynamics is a private company, so you can’t invest in it.
But you can gain exposure to the intersection of robotics and AI with BOTZ. “We see BOTZ as a more niche play on applied automation,” Dessai says. For example, the second-largest holding in BOTZ is Intuitive Surgical Inc. (ISRG), a leader in the field of robotic-assisted surgery. Its da Vinci systems enable surgeons to perform complex and delicate procedures with enhanced precision through tiny incisions.
Roundhill Generative AI & Technology ETF (CHAT)
Generative AI refers broadly to algorithms that can create new content — from text to images to music –based on the data they’ve been trained on. Examples available to the public include AI-driven tools like OpenAI’s ChatGPT for text generation and DALL-E for image creation, both of which are based on the aforementioned LLMs, a specialized subset of generative AI. For exposure to this, consider 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,” explains Dave Mazza, CEO at Roundhill Investments. “Companies are then scored and selected based on their exposure to AI, market capitalization and liquidity.”
iShares Future AI & Tech ETF (ARTY)
Prior to Aug. 12, 2024, ARTY used to be called the iShares Robotics and Artificial Intelligence Multisector ETF (IRBO). Before this change, the ETF utilized an equal-weight index that delivered higher exposure to mid- and small-cap stocks. After the update, ARTY now tracks the Morningstar Global Artificial Intelligence Select Index, which now emphasizes large-cap stocks more.
This ETF’s top holdings is a “who’s who” of the AI industry, with Nvidia, Broadcom Inc. (AVGO), Advanced Micro Devices Inc. (AMD), Super Micro Computer Inc. (SMCI), Palantir Technologies Inc. (PLTR), Meta Platforms and Alphabet Inc. (GOOGL) represented. While not as cheap as XAIX, ARTY is still considered fairly affordable in the AI ETF segment with a 0.47% expense ratio.
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6 of the Best AI ETFs to Buy Now originally appeared on usnews.com
Update 11/04/24: This story was previously published at an earlier date and has been updated with new information.
