The announcement of OpenAI’s ChatGPT and Google’s Bard has sparked a great deal of interest in artificial intelligence, making it a hot topic in both mainstream and financial circles. Anyone can now access powerful AI tools and models for little or no cost. Although it is difficult to quantify the impact of AI, it is a technological innovation with the potential to change society in the same way that the introduction of the Internet has.
Investors have quickly turned their attention to the growth potential of AI-related companies. In May 2023, Nvidia NVDA outperformed earnings, revised its forecasts upwards, and soon saw a boost in AI investments thanks to its focus on graphics processing units used for generative AI and large-scale language models such as ChatGPT. It has become a representative figure. Investors believe that NVIDIA’s success is a tangible demonstration of AI’s importance and financial viability, even though NVIDIA isn’t developing AI applications, but building the tools used for computation. I assumed it was a good signal. As a result, NVIDIA’s price he surged 27% from May 22nd to May 26th, pushing the market cap past his glorious $1 trillion threshold.
Between May 22nd and May 26th, investors poured about $232 million into exchange-traded funds specifically targeting companies like Nvidia that are building AI applications or benefiting from them. rice field. While this could be the start of a hot new theme in ETF investing, U.S.-based AI-focused ETFs have just $3.28 billion in assets, with U.S. assets at the end of May 2023 It’s only a fraction of the total ETF market. Below we list the largest of these ETFs.
3 bets investors are making on AI ETFs
Investing in instruments aimed at exploiting a single theme can often end up with narrow bets. Thematic ETFs typically focus on one or two sectors of the market and hold a small number of companies. However, the potential applications of AI technology are so vast that companies that benefit from AI are more likely to be missed than other themes. If AI proves to be revolutionary, it will have implications for the entire business world, and much of the market will benefit, not just Nvidia.
AI ETFs are enjoying their moment in the limelight, but as with other types of thematic ETFs, it’s important to stay grounded when evaluating AI ETFs. Thematic investments usually require him to make bets from three directions:
- The theme is realistic and durable.
- The fund is a good representation of the theme and holds companies that stand to benefit from it.
- The growth potential of this theme has not yet been built into the price.
It seems obvious to bet that a subject like AI will have a lasting impact and win, but it can be harder to predict than it might seem at first glance. Experience has shown that most themes are temporary and do not lead to sustainable returns for shareholders. For example, the Direxion Work From Home ETF WFH, which aims to invest in companies that encourage people to work from home, had $174 million in assets under management as of December 2020. At the time, much of the world was still under strict lockdown. coronavirus pandemic. Wealth plunged to $31 million by the end of May 2023, proving the vulnerability of the subject as lockdown restrictions are lifted and vaccines are widely distributed. That said, AI looks more promising than most themes entering the ETF market due to the many possible use cases.
The challenge of finding AI-exposed funds
Choosing a fund that is well-positioned to leverage an AI theme can be difficult. Themes can be difficult to articulate in real-world terms, and the big companies may not offer a genuine touch on the subject. For example, how should investors view the growth potential of AI? Will it replace search and customer service with chatbots? Or will it be AI’s ability to identify diseases and discover new drugs? ?
Thematic funds have the difficult task of determining which companies might benefit from this nascent technology. And the lack of consensus is despite the fact that the two largest AI ETFs, the Global X Robotics & Artificial Intelligence ETF BOTZ and the iShares Robotics & Artificial Intelligence Multi-Sector ETF IRBO, focus more narrowly on robotics. , indicating that as of May 2023, there are still only 12 common holdings.
By the time the potential of a theme becomes apparent, the market will already be pricing in that potential. Acquiring a company at a high valuation suppresses expected earnings. For example, NVIDIA’s PER jumped from 179.17 on May 22, 2023 to 202.84 on May 26, 2023. The company’s management will need to increase revenue by another 13% to meet the new ratings on top of already high expectations. reflected in stock prices. It can be difficult to rationalize purchases at such high valuations.
3 Great Total Market ETFs for AI Exposure
Investors may wonder whether AI ETFs are adequately exposed to the widespread impact of current and future AI developments and the AI gold rush. Concentrated portfolios are more likely to miss companies poised to benefit from AI development. Aggressively positioning your portfolio to attract companies that will reap the benefits of AI can be labor intensive and time consuming. However, owning a larger portion of the market may increase the likelihood that investors will have early access to winning stocks and themes.
Inexpensive total market ETFs may be the best option to take advantage of the wide range of innovations across not only AI but all other themes. These ETFs span all stocks and are weighted by market capitalization, utilizing the market’s collective view of the relative value of each stock. Companies that benefit from AI development will certainly be included in portfolios and their allocation will increase along with their relative performance.
Here are three of our favorite total market ETFs to consider.
The future of investing in AI ETFs
Timing a theme’s possibilities is like guessing what the weather will be like five years from today. Only those who can speak to the Market Oracle may get a chance. For the rest of us, the next closest thing is to buy a cheap, well-diversified total market index fund so that we don’t miss out on the game-changing innovations that AI can bring to the market.
