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Since the groundbreaking announcement of ChatGPT in November 2022, artificial intelligence has revolutionized the investment landscape.
Since then, investors have been pouring money into all things AI-related in search of the next big winner. In 2023, a group of large technology companies known as the Magnificent Seven (Tesla, Amazon, Meta Platforms, Apple, Microsoft, Alphabet, and Nvidia) contributed much of the market's rise.
These tailwinds continued in 2024, but even the winners will reach their limits at some point. In fact, some of this year's biggest gainers came down to earth on Friday, with Big Tech names pushing the Nasdaq Composite down more than 2%.
“You have to do your job,” said Jay Woods, chief global strategist at Freedom Capital Markets. “You want to do your research, you want to know what you're buying and the risks involved. There's a lot of unknowns with his current AI.”
AI is poised to become a central theme as the technology moves from early-stage winners to second-stage adopters. Portfolio and wealth managers say investors looking for a long-term strategy in this space may want to take certain strategies.
what to look for
While there is no secret formula for investing in and picking artificial intelligence stocks, investors can pay attention to certain metrics and trends as they weed out winners from failing stocks.
Carol Schleif, chief investment officer at BMO Family Office, recommends always paying attention to a company's cash burn and how it spends its money when investing in new industries. Pay attention to small details, such as how a company handles its backlog and how much money it spends on infrastructure.
Schleiff also recommends considering government subsidies when it comes to semiconductor stocks. In 2022, President Joe Biden signed his CHIPS Act, a huge win for the industry. The measure allocated funds to expand semiconductor production on U.S. soil.
Samsung Electronics will receive funding from CHIPS to manufacture semiconductors in Texas, and Intel stands to receive up to $8.5 billion from the measure.
“Focus on the underlying fundamentals and whether they are moving in the right direction. [rather] “It’s not just about last quarter’s revenue,” Schleif advised.
Investors should also avoid blindly chasing strong winners who have benefited from the AI enthusiasm. For Nancy Tengler, CEO and CIO of Laffer Tengler Investments, that means focusing on some of the old economy stocks that are embracing the new digital wave. She is a veteran in the technology industry. She likes Microsoft and her IBM.
Financial advisors and portfolio managers emphasize the importance of diversification when building portfolios, and the same applies to AI.
Exchange-traded funds may be a good way to gain diversified exposure to a basket of stocks that could benefit from AI themes, rather than fixating on one or two promising stocks.
Consider diversification with ETFs
Margherita Chen, a certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Md., says choosing an ETF with dozens of stocks is less risky. He says that it can be a low dispersion method.
She highlighted the Global X Robotics & Artificial Intelligence ETF (BOTZ), First Trust Nasdaq AI & Robotics ETF (ROBT), and the Global X Artificial Intelligence & Technology ETF (AIQ).
“This is one way to get exposure without putting all your eggs in the proverbial basket,” BMO's Schleif said. “We want to be able to focus on a few different levers to help us withstand volatility.”
AI ETF and its performance in 2024
| name | expense ratio | Year/Month/Date % change |
| Global X Robotics and Artificial Intelligence ETF | 0.68% | 0.53% |
| First Trust Nasdaq AI and Robotics ETF | 0.65% | -10.34% |
| Global X Artificial Intelligence & Technology ETF | 0.68% | 0.90% |
| Roundhill Generative AI and Technology ETF | 0.75% | 3.20% |
Volatility can be a bitter pill to swallow, especially for novice investors. Helen Dietz, CFP and managing director at Aspiriant, said stocks tend to initially rise when a new theme becomes mainstream, but at some point they often experience volatility and declines.
“The newer the trend, the more volatile it is,” she said. “These corrections in individual stocks and sectors can sometimes be very violent, which is not uncommon and can be scary for regular investors.”
As a result, Nvidia's stock price fell 10% on Friday, marking its worst day since March 2020. The decline sharply reduced chip stocks' year-to-date gains, but they are still up nearly 54%. 2024. Fellow AI industry supermicrocomputers also fell sharply on the day, dropping 23%.
ETFs typically have different names and may have different weightings. BOTZ ETF and Roundhill Generative AI and Technology ETF (CHAT), but both currently lag some of this year's popular AI winners. However, the underlying names vary. BOTZ owns his Nvidia, Robotics owns Intuitive Surgical, while CHAT's top holdings include Microsoft, Meta, and ServiceNow.
Schleiff recommends looking for ETFs that have high volumes and are backed by reputable companies. Investors should also be wary of fees, as fees that are too high can eat into profits.
Woods said the gains may not match the surges seen in stocks like Nvidia and Meta, but ETFs can give investors exposure to the sector with lower risk. Stated. In the long term, investors could also consider leveraging the leadership of these funds to select individual names in the future.
“The old cliché is to time the market and hope to find individual stocks that can really outperform,” Woods said. “If you want to participate, you want to diversify, and I think ETFs are the best way to do that.”
