How do you invest in AI as AI hype floods the market? VettaFi financial futurist Dave Nadig joins Yahoo Finance Live to discuss the best ways to invest in AI, the top artificial intelligence ETFs, and Discuss if it’s just a hype cycle.
video transcript
Akiko Fujita: Well, the US market has registered a significant rally so far this year. But there are even bigger gains in markets around the world. Recent data points to an increasing flow of money into foreign equities. And our next guest says it’s beneficial to diversify. Joining us this time is VettaFi financial futurist Dave Nadig. He is this week’s ETF report from Invesco QQQ.
The international market we often hear about. But we are talking about different markets, not just Japan, emerging countries, Europe, etc. Where do you see the influx from?
Dave Nadig: Now, the inflows into international equities have been pretty strong so far this year, which was a big surprise. Historically, the US has a home bias of about 70%. So for every $10 in, we expect about $7 in US equities. It was kind of the opposite this year. We invested about $33,34 billion in international equities. Changed to US stocks at 20.
Much of that focus has been on Europe. Europe Many managers I have spoken to see Europe as the place to look for growth in the remainder of 2023 and next year. Part of it is just diversification, not just the types of companies, but the regulatory regimes as well.
In several areas, such as AI, cryptocurrency regulation, and even core financial regulation, things have been severely divided between the U.S. and the rest of the world. Those are now really important differences. These regulatory differences can create opportunities.
So, so far, we see Europe outperforming the S&P by about 5% or 6% year-to-date on a hedged basis. And I think that’s the point. Hedging exposures like Europe and Japan makes a lot of sense when there is still a lot of central bank activity.
Sheena Smith: So, Dave, talk about some of the ways that investors can play this out more specifically in terms of the money that’s exposed to that play.
Dave Nadig: of course. So what we often see is WisdomTree’s Hedge Europe, which reminds us that it’s ATDJ. It’s up about 16%, 17% so far this year. And basically just buy a basket of euro denominated stocks and hedge all euro exposure.
So don’t get stuck in this game of trying to bet on both whether a company is a good company or whether a country is a good country. But it’s also important whether central bank policy between the two countries and the US aligns particularly favorably if they short the dollar first and buy the euro.
So I think it’s a good time for people to reassess their international exposures and consider the currency implications.
Akiko Fujita: Well, the regulatory dichotomy is an interesting point. Because it’s starting to show. One area where regulation is not yet fully in place is AI, an area we love to talk about. I mean, there’s a lot of different plays we’ve heard from analysts who have appeared on the show. But how do you look at it from a passive investing perspective?
Dave Nadig: Well, there are index-based commodities that can be examined to approach there. VettaFi manages indices based on Robo-ETFs or ROBOs. The biggest player in this space would be his BOTZ from Global X. And when there are still many moving parts on the field, this kind of passive approach makes a lot of sense.
We see better performance, more innovation, equity and active management strategies in these types of products than in some arc-type products. Sure they were looking at AI, but we haven’t seen the deep emphasis we’ve seen yet. For something like BOTZ, the reason BOTZ is up over 40% of his alone this year is largely due to his heavy investment in Nvidia.
And you remember what the earnings report looked like last week, right? So that kind of play really helps. However, it should be noted that these are very concentrated bets. Whenever we focus on a particular theme, we should think of it as a speculation rather than as a core holding. Because these stocks fluctuate with headline hype cycles.
Sheena Smith: So, on the flip side, you’re probably also promoting exposure to AI through big tech companies like Microsoft and Google that are in the AI business, but are clearly much more diversified. I guess not. than those fellow players.
Dave Nadig: The thing is, we all already own those things, right? You have a large exposure. The problem is that much of the interesting research is being done either by private companies like OpenAI, which is behind ChatGPT, or by smaller startups that are apparently not yet accessible.
It’s still early days, so there’s a strange juncture that what you can buy might be a little too diluted to be considered real play in this space. You can’t buy something that is pure play. I think it would be wise to focus on the industries and companies that will be most impacted by AI. These include medical, transportation, logistics, factories, and retail.
We are already seeing tremendous benefits from robotics and AI. I believe that growth will continue in the future.
Akiko Fujita: I’ve heard so many guests talk about pickaxes and shovels when talking about AI.
Dave Nadig: yes.
Akiko Fujita: So what about that kind of foundational effort, whether it’s Nvidia or some other semiconductor name? Is that a good way to bet on the future of AI?
Dave Nadig: I think it’s a good way to bet on future time periods. right. So I think AI will be a sub-theme of the little tech bubble we’re going to run into here. AI improves productivity. Profit margins for these tech companies will increase. Yes, but so are the companies they serve. So think about your exposure to technology in general. Consider where your focus is.
And if you want to put a little more effort into real-world automation and AI play, or a little more industrial than technology, products like bots and ROBOs can help.
Akiko Fujita: OK. Dave Nadig, nice to hear your opinion. Thank you for your time.
Dave Nadig: Thank you for inviting me.
