Table of Contents
- Key Highlights:
- Introduction
- The Appeal of AI Investment
- Broad Group of Companies Involved in AI in Different Capacities
- Narrower Focus, Stronger Results
- International Aim and Combination of Well-Known and Lesser-Known Names Yields Impressive Returns
- The Role of Management Fees and Expense Ratios
- Investment Strategy Considerations
- Future Outlook for AI and ETFs
Key Highlights:
- Many AI-centered exchange-traded funds (ETFs) are heavily weighted towards a few prominent companies, such as NVIDIA, which can limit portfolio diversity.
- Newer ETFs, like the First Trust Nasdaq Artificial Intelligence and Robotics ETF and iShares Future AI & Tech ETF, offer broader exposure to a variety of smaller companies involved in AI.
- Performance varies widely, with funds like the ROBO Global Artificial Intelligence ETF outperforming others thanks to a diverse and international focus on AI-related technologies.
Introduction
The emergence of artificial intelligence (AI) has transformed various facets of technology and industry, spurring significant interest from investors. The vast potential of AI applications has ignited a surge in investment products, particularly exchange-traded funds (ETFs) that seek to capitalize on the growth of this dynamic sector. While many traditional ETFs heavily invest in well-established tech giants like NVIDIA, there is a burgeoning market for ETFs that provide a more diversified approach. By looking beyond the typical heavyweights, investors can also tap into lesser-known companies that offer innovative solutions and services. This article delves into various AI-focused ETFs, examining their strategies, performance, and potential for growth.
The Appeal of AI Investment
Investing in AI-related ETFs appeals to a wide array of investors because it combines technological innovation with compelling growth potential. The momentum surrounding AI is driven by advancements in machine learning, natural language processing, robotics, and data analytics, which have permeated diverse sectors. For both seasoned and novice investors, ETFs provide an accessible avenue to gain exposure to this evolving market without the need for in-depth research on individual stocks.
However, a common concern among investors is the heavy concentration of holdings in well-known companies. While these companies may be leading the charge in AI developments, a narrow investment focus can increase risk. As AI continues to rapidly evolve, diversification across a wider range of companies can enhance opportunities for growth.
Broad Group of Companies Involved in AI in Different Capacities
First Trust Nasdaq Artificial Intelligence and Robotics ETF (NASDAQ: ROBT)
The First Trust Nasdaq Artificial Intelligence and Robotics ETF is an exemplary case of a fund offering diversified exposure to AI and robotics. It targets companies classified as enablers, engagers, or enhancers of AI technology. With over 100 holdings, ROBT allows investors to benefit from a wide variety of firms engaged in robotics and AI solutions.
Recently, the biggest holding in the ROBT fund was Symbotic Inc., a firm focused on warehouse automation, which represented only 2.4% of the portfolio. This low concentration of any single company underscores the fund's commitment to diversification. With a year-to-date performance of 9.7%, ROBT slightly outperformed broader market indices like the S&P 500.
Expanding the Investment Universe: Broadening the AI Investment Horizon
Robust ETFs like ROBT indicate a trend towards recognizing the potential of smaller firms that may lead to substantial growth in the AI sector. By focusing on a broader pool of companies, investors have the opportunity to capture unseen gains and innovations that larger players may miss.
In this rapidly shifting industry, the nimble adaptability of emerging companies can lead to groundbreaking advances in AI applications. The quest for diversification is key, allowing investors to navigate an evolving market landscape that promises both challenge and opportunity.
Narrower Focus, Stronger Results
iShares Future AI & Tech ETF (NYSEARCA: ARTY)
For those looking for a more focused approach, the iShares Future AI & Tech ETF offers access to companies poised to drive substantive advancements in AI development. Tracking the Morningstar Global Artificial Intelligence Select Index, ARTY encompasses firms critical to generative AI, infrastructure, software, and services.
Despite containing about half the number of holdings compared to ROBT, ARTY’s larger allocations to individual companies (up to 5.9%) provide investors with a unique balance of targeted exposure and potential profitability. Lesser-known names like PTC Inc. and Advantest Corp. find themselves represented within this fund, showcasing an investment philosophy that favors promising technology businesses over market giants.
With a year-to-date performance of 11.4% and a competitive expense ratio of 0.47%, ARTY poses as an attractive option for investors seeking both growth and liquidity.
International Aim and Combination of Well-Known and Lesser-Known Names Yields Impressive Returns
ROBO Global Artificial Intelligence ETF (NYSEARCA: THNQ)
The ROBO Global Artificial Intelligence ETF combines American equities with international stocks, offering a diverse view of the global AI landscape. THNQ is particularly noteworthy for its noted performance in 2023, achieving a year-to-date return of 14.5%. This outperformance underscores the fund’s varied approach, featuring both widely recognized industry players and innovative smaller companies.
With about 55 holdings diversified across extensive sectors, THNQ emphasizes firms that facilitate AI applications through cloud computing, data services, and more. The largest company in this portfolio holds just 3.3%, signifying a commitment to reducing concentration risk. This diversified approach enables investors to gain exposure not only to companies shaping the future of AI but also to those innovating within various application spaces, further enhancing the fund's potential for returns.
Though the expense ratio for THNQ stands at 0.68%, this is still moderate compared to actively managed funds, especially given its strong performance metrics.
The Role of Management Fees and Expense Ratios
For many prospective investors, understanding management fees is crucial when evaluating ETF options. Lower expense ratios indicate a cost-effective way to gain exposure to a sector without sacrificing potential returns. All four ETF options examined have distinct management fees, ranging from ROBT at 0.65% to ARTY at 0.47%, and THNQ at 0.68%.
Investors should consider how these fees align with fund performance. While lower fees are generally favorable, they should weigh their options against past performance and growth potential. Solid year-to-date returns in funds like ARTY and THNQ provide compelling reasons for prioritizing performance over minimal cost savings.
Investment Strategy Considerations
When choosing an AI-focused ETF, investors must develop a clear investment strategy in alignment with their risk appetite and desired returns. Funds such as ROBT offer broader exposure, ideal for those looking to diversify across the tech landscape without significant individual company risk. In contrast, those willing to take on slightly higher risk for potentially greater returns may prefer more focused ETFs like ARTY, which allocate larger portions to fewer companies.
International focus, as offered by THNQ, provides an additional layer of complexity and opportunity. Investors must navigate the various threats and opportunities inherent in international investments, making due diligence essential in evaluating market conditions globally.
Future Outlook for AI and ETFs
As businesses continue to integrate AI into their operations, the demand for innovative solutions will only grow. This expanding market directly influences the attractiveness of AI-focused ETFs. Funds that leverage the evolving landscape of technology, and focus on both established and emerging companies, are well-positioned for sustained growth.
For investors, constructing a well-rounded portfolio that not only includes large-cap tech giants but also supports smaller firms can enhance exposure to promising technologies and trends. Investing in diversified ETFs covering both familiar and lesser-known players allows for the potential capture of growth across a broader range of market opportunities.
FAQ
What are AI-focused ETFs? AI-focused ETFs are exchange-traded funds that invest in companies involved in the development and application of artificial intelligence technologies. They can range from specialized funds focused solely on AI companies to broader technology funds with significant AI exposure.
How do I choose the right AI ETF? Choosing the right AI ETF involves considering factors like diversification, expense ratio, past performance, and alignment with your individual investment strategy and risk tolerance. Investors should also evaluate the underlying holdings of the ETF to understand its focus within the AI landscape.
What is the importance of diversification in AI investments? Diversification is crucial in AI investments due to the high volatility and rapidly changing nature of the sector. A diversified portfolio can reduce risk by spreading investments across various companies and sectors, positioning investors to benefit from emergent trends and developments.
Are there risks associated with investing in AI ETFs? Yes, investing in AI ETFs carries risks, including potential market volatility, concentrated holdings in certain companies, and changes in technology adoption rates. Investors should conduct thorough research and remain informed about market dynamics and individual fund performance.
What is the expected growth of the AI sector? While projections vary, the AI sector is expected to grow significantly over the next decade as advancements in technology spur adoption across multiple industries. Investing in AI-focused ETFs offers exposure to this growth and the opportunity to capitalize on the broader technological advancements expected in the future.