etf.com Guide to Investing in the AI Revolution With ETFs

By now, everyone is well aware of the vast potential of artificial intelligence—the launch of OpenAI’s ChatGPT and the subsequent gains for AI ETFs made sure of that. Until Meta Platforms’ Threads came along, ChatGPT became the fast-growing app to reach 100 million users. 

But the long-term impact of AI on the economy and businesses is less well understood. A recent research report from analysts at PricewaterhouseCoopers tried to quantify it. 

They estimated that global gross domestic product could jump by 14% to $15.7 trillion in 2030 as a result of AI-driven advancements. By their calculations, the greatest gains from AI will be seen in China and North America. 

PwC, which defines AI as “computer systems that can sense their environment, think, learn, and take action in response to what they’re sensing and their objectives,” will both automate tasks and help people make better decisions and perform tasks better.  

Recent advances in generative AI, a type of artificial intelligence that uses patterns within data to generate new content, have deepened mainstream understanding of AI’s potential.  

In turn, companies are scrambling to figure out how they can incorporate AI into their businesses to improve their products and beat the competition. 

While some companies say they’ve been focusing on AI all along, others are doubling down on their AI-related spending. Global spend on AI systems is expected to be around $150 billion this year, according to IDC Technologies, up from just under $100 billion in 2021. And by 2026, spending is expected to double to $300 billion. 

The industries that are expected to spend the most on AI include banking, retail, professional services, manufacturing and healthcare.  

Early Adopters and the Case for AI ETFs

The numbers tell a straightforward story: Spending on AI will continue to grow in the coming years. But who will be the most likely beneficiaries? 

The most obvious beneficiaries are the so-called pick-and-shovel providers who sell the technologies necessary to create AI experiences. 

Semiconductor giant Nvidia Corp. has arguably been the biggest winner of the AI boom so far. The firm is the world’s largest producer of graphics processing units, or the chips that enable the complex computations that are needed for AI applications. 

The company has a 95% share of the market for the GPUs that are used for AI, according to New Street Research. Meanwhile, the companies that use those chips within the powerful computers that they rent out—such as cloud computing providers Microsoft Corp., Amazon.com Inc., and Alphabet Inc.— also are poised to benefit. 

Another set of winners are the companies that create AI models, or sophisticated algorithms that are the result of processing vast amounts of data—like OpenAI.  

And of course, companies that use AI within their end-user applications, such as Adobe, Microsoft, Alphabet and countless other existing and future companies, also could benefit from AI, as could companies that use AI to improve their physical products, like Tesla and Apple.  

But as with any theme, figuring out which companies stand to gain the most from AI is a difficult task. And AI’s disruptive nature makes the job even tougher, as there will likely be big winners and big losers as the tech gets increasingly adopted.  
  
That’s why investing in AI through ETFs—which hold dozens of stocks—might make more sense than investing in individual AI-related stocks.  

Two Types of AI ETFs  

AI ETFs can be separated into two broad buckets. One is probably the first thing that comes to mind when you think of AI ETFs—funds that invest in the stocks of companies that stand to benefit from the growth in the AI industry. You can think of these as AI-themed ETFs.  

These funds typically invest in companies like the ones mentioned earlier—Nvidia, Microsoft and others. The various ETFs in this bucket can look quite different depending on the index tracked or the fund manager’s views in the case of active ETFs.  

The other bucket includes AI-powered ETFs. These funds use AI as a tool in deciding which stocks to hold. The stocks they buy might have nothing to do with artificial intelligence.  

These can be broad ETFs that pick and choose stocks from the entire stock market universe based on AI’s recommendations, or they can be narrower funds that invest in one sector or one geography.  

In general, AI-themed ETFs have performed better than AI-powered ETFs and they are much more popular among investors. According to etf.com data, there are currently 28 AI ETFs listed in the U.S. Of those, 17 are AI-themed ETFs and 11 are AI-powered ETFs. 

AI-themed ETFs collectively have $6 billion in assets under management, while AI-powered ETFs have a much more modest $702 million in AUM. 

Combining Themes With AI ETFs

Within the AI-themed ETF bucket, there is quite a diverse set of options for investors to consider. Some of these funds target AI companies specifically, while others combine them with companies focused on other themes, like robotics or quantum computing.  

The Global X Robotics & Artificial Intelligence ETF (BOTZ) is the largest fund in the segment, with $2.5 billion in AUM.  

It tracks the Indxx Global Robotics & Artificial Intelligence Thematic Index, which includes companies involved with industrial robotics and automation, nonindustrial robots, AI and unmanned vehicles. 

The result is a portfolio whose top holdings include Nvidia and Intuitive Surgical, the maker of the da Vinci Surgical System, which allows surgeons to operate with the help of robots.

Meanwhile, the second-largest fund in the segment, the SPDR S&P Kensho New Economies Composite ETF (KOMP), invests in companies disrupting traditional industries by leveraging “advancements in exponential processing power, artificial intelligence, robotics, and automation.” 
 
Interestingly, the ETF’s holdings include crypto companies such as Coinbase Global and Hut 8 Mining. It also holds Snap, Meta and Apple. 
 
The differences in the portfolios of BOTZ and KOMP illustrate how ETFs targeting the same themes can vary significantly in terms of the stocks they hold.  

Targeted Exposure With AI ETFs 

The combination of AI and robotics is a popular one within ETFs that hold artificial intelligence stocks. But it’s not the only one.  

The Defiance Quantum ETF (QTUM) holds stocks of companies working on quantum computing—cutting-edge technology that leverages the principles of quantum physics to perform incredibly powerful computations—as well as AI. 

Meanwhile, the Innovator Deepwater Frontier Tech ETF (LOUP) takes a much broader approach by holding stocks of companies involved with “artificial intelligence, fintech, robotics, autonomous and electric vehicles, and virtual/augmented reality.” 
 
Of course, the broader an ETF’s mandate, the less focus there may be on AI specifically. Funds like the Vanguard Information Technology Index Fund ETF (VGT) already offer investors broad exposure to technology. 
 
Some investors—especially those reading this—may be looking for more targeted exposure to AI. 

For that, there are a few funds whose mandate is to solely target the AI theme. The Global X Artificial Intelligence & Technology ETF (AIQ) is one such fund. 
 
It invests in companies that stand to benefit from “the further development and utilization of artificial intelligence (AI) technology in their products and services,” as well as in companies “that provide hardware facilitating the use of AI for the analysis of big data.” 
 
Another option is the actively managed Roundhill Generative AI & Technology ETF (CHAT), which invests in companies involved in AI, generative AI as well as “related technologies.” 

AI-Powered ETFs 

AI bucket number two includes ETFs that use AI technologies to pick and choose what stocks to hold. Some of these funds solely lean on AI to make those decisions, while others use it more as a guide. 

The WisdomTree US AI Enhanced Value Fund (AIVL) is the largest AI-powered fund on the market today, with $387 million in AUM. 

The ETF holds value stocks based on the selection results of “a proprietary, quantitative artificial intelligence (AI) model developed by Voya Investment Management Co.” 
 
Its top holdings currently include The Williams Companies, Inc., Intercontinental Exchange Inc. and Abbott Laboratories. 

The only other AI-powered ETF with more than $100 million in AUM is the AI Powered Equity ETF (AIEQ). It uses the IBM Watson platform to generate insights and decide which stocks to own. 

The Watson platform helps the ETF to analyze “millions of data points across news, social media, industry and analyst reports, financial statements on over 6,000 U.S. companies, technical, macro, market data and more.” 
 
Launched in 2017, AIEQ’s claim to fame is that it is the first actively managed ETF to “fully utilize artificial intelligence as a method for stock selection.” Yet it’s sharply underperformed the S&P 500 since inception, with a gain of 42% versus 92%. 

While still early in its usage as a stock-picking tool, AI hasn’t proven it can successfully select which stocks will outperform.  

Still Early Days for AI ETFs 

Investors should also understand that no AI ETF, even those that hold stocks of AI-related companies, is a guaranteed investment. AI is a revolutionary technology that will likely reshape entire industries and economies, but which companies will benefit is still very much up in the air. There is no assurance that any of the ETFs mentioned above or below hold the winners of the revolution.  

For a full list of the AI ETFs currently on the market, see the table below.  
 
Since AI ETFs can vary so dramatically, investors should look under the hood to get a closer look at each fund’s strategies and holdings. Click on a fund’s name to go to its fund page where you can find more information. 

By Sumit Roy

Follow Sumit Roy on Twitter @sumitroy2      

List of AI ETFs

Contact Sumit Roy at [email protected]