How to Invest in AI – Forbes Advisors

Every investor wants to get to their next big undertaking early. today, artificial intelligenceWhat is commonly called AI is the next big thing.

Deciding how to invest in AI today resembles the choices faced by investors pondering the explosive growth of railroads in the late 1800s. You can buy railroad stocks, or you can invest in companies that benefit from railroads, such as textile manufacturers and beef processors. The goods of these companies are delivered to the port faster and cheaper.

One of the challenges in investing in AI is the paucity of pure AI opportunities available in the market. As a result, we have been looking at ways we can invest in companies and funds that will benefit from the AI ​​gold rush.

What is AI and why is it popular now?

Technology giant IBM defines AI as the use of computers, machines and software that “mimics the problem-solving and decision-making abilities of the human mind.” The goal of artificial intelligence applications is to solve problems faster and automate tasks normally performed by humans.

The great interest in AI started in November 2022 when OpenAI first released ChatGPT to the public. This chatbot service uses natural language to create human-like conversations. Users ask questions on any subject imaginable and ChatGPT provides detailed answers.

But this ingenious platform is just the latest in AI, a field of computer science that has risen and fallen in popularity since the 1950s.

“AI is not new,” says Michael Robbins, director of private equity firm Blythestone and London hedge fund UEC. “The hype around ChatGPT stems from growing awareness of what AI means for the economy.”

The term “artificial intelligence” itself was coined in 1956 by John McCarthy of MIT and Marvin Minsky of Carnegie Mellon University. That year, the two academics hosted a workshop entitled the Dartmouth Summer Research Project on Artificial Intelligence, aimed at defining the fundamentals of AI.

That’s enough for a history lesson. Analysts at PricewaterhouseCoopers believe AI innovation could boost global gross domestic product (GDP) by up to 14% by 2030. Such growth will make AI “the greatest commercial opportunity in today’s rapidly changing economy,” PwC writes.

How to invest in AI

There are many ways to invest in AI today. You can buy shares in publicly traded companies that develop AI software and manufacture the hardware that runs AI applications. Alternatively, a new category of exchange-traded funds that invest in artificial intelligence companies has emerged.

Invest in companies that benefit from AI

Buying individual stocks is always riskier than owning a fund. But if you’re willing to accept additional risk and benefit from potentially greater returns, here are three of the best AI stocks available on the market.

• Microsoft (MSFT). Microsoft CEO Satya Nadella said his company is betting everything on AI. MSFT has partnered with OpenAI to integrate ChatGPT with the Bing search engine. Additionally, the company integrates AI with Microsoft 365, the cloud-based version of its popular office productivity application suite. AI helps users compose text in Word, visualize maps and charts in Excel, and streamline their email inboxes. MSFT shares are up more than 40% year-to-date.
• NVIDIA (NVDA). The semiconductor powerhouse has thrived making computer chips that power 3D graphics, cryptocurrency mining, and other applications ranging from robotics to medical imaging. In recent years, Nvidia chips have proven popular for running powerful algorithms that are the backbone of AI applications. NVDA’s stock has soared more than 200% since the beginning of the year.
• C3.ai (AI). As the name suggests, the company is a pure-play artificial intelligence company, with an entire business dedicated to implementing AI solutions for its customers. And a quick look at just a few of C3.ai’s customers highlights the economic potential of AI, including oil and gas giant Shell, mining giant Koch Minerals, packager Ball, and the U.S. State Department. It can be seen that the range of influences is wide-ranging. They use his C3.ai service to improve reliability, detect fraud, monitor computer networks, optimize supply networks and manage energy usage. The company’s stock has surged more than 250% year-to-date, but a look at the long-term charts provides warning as the stock is 70% below its 2020 all-time high.

Should You Buy AI Stocks?

Just because Microsoft, Nvidia, and C3.ai were big winners this year doesn’t mean they’re necessarily the best stock investments right now.

First, the price of AI stock has skyrocketed, making its valuation unattractive. As of July 10, the AI ​​stock basket created by JP Morgan Securities has risen 42% over the year compared to the S&P 500, which represents the entire stock market. The broader technology sector is up 25% compared to the benchmark index.

Another reason to be cautious is that AI stocks may pause to digest the gains. “In the short term, AI companies may outperform the market as a whole,” Robbins said.

Finally, successful AI stocks are not necessarily future winners. Two of his three AI stocks above are mega-cap companies. But history shows that small, agile growth stocks are more likely to introduce and profit from innovative new products and services.

Buy AI Exchange Traded Funds

Investing money in AI-themed ETFs is a less risky alternative to owning AI stocks.

Leading ETF fund families are adding to existing products or launching new funds to capitalize on the surging demand for AI investments. As of 2023, inflows into the AI ​​ETF have increased by over 70%. By comparison, the overall increase in US Listed Equity ETFs was 2%.

According to ETF.com, there are currently 17 US ETFs, at least primarily focused on AI or its likes, machine learning. They own shares in companies that make products such as computer chips for the AI ​​industry or use AI in their own businesses. Here are his four AI ETFs with the highest total returns in the last 12 months. Additionally, compare their returns to the benchmark S&P 500.

• Direxion Robotics, Artificial Intelligence, Automation Index Bull 2X Share (UBOT). This is a leveraged ETF that seeks to generate 2X the return of its benchmark index, the Global Robotics & Artificial Intelligence Thematic Index, daily. The fund will invest in companies in developed markets that are expected to benefit from robotics and artificial intelligence. Major holdings include Nvidia, Keyence and Intuitive Surgical. The fund’s annual expense ratio is 1.35%.
• Global X Robotics & Artificial Intelligence ETF (BOTZ). This fund is roughly an unleveraged version of UBOT. It tracks the same index, but the daily return is about half that of UBOT. The fund’s top holdings are the same as UBOT’s holdings, but with a different weighting.
• Franklin Intelligent Machine (IQM). This Franklin ETF covers a wider range of companies than either of the two funds above. Its benchmark is the Russell 3000 Index, but its mission is narrower. IQM seeks equity in companies developing technologies that support AI, machine learning, and automated processes. Top holdings include automakers Tesla, Apple and semiconductor company ASML Holdings.
• AIQ Artificial Intelligence and Technology (AIQ). The ETF looks for artificial intelligence innovators, both established and new, regardless of sector or geography. The company’s major holdings include Meta Platform, CRM leader Salesforce, and software company Adobe.

Final Words on AI Investing

Entering the first floor of new technology trends like AI can be exciting and enriching for investors. However, it’s worth keeping in mind that AI, like everything else in the stock market, is subject to the realities of the hype cycle.

New technology breakthroughs fuel dynamic start-ups and massive media coverage, pushing stock prices to the ceiling. But triple-digit annual profits never last, and ultimately the market divides the few winners from the many losers. Careless investors can get burned.

If you’re considering investing in AI, the first step is to do enough research. Please read carefully to learn about the technology and assess the risks before purchasing. You don’t have to go all-in on AI. Smart investors rely on diversification to get the most out of their investment capital. Consider discussing AI investment ideas with your financial advisor.

Data including performance, asset levels and ETF net inflows are from Morningstar Direct and are current as of July 13, 2023.