Volatility Is 'Inevitable' for AI, Novel Technologies: ETF Analyst

Bloomberg ETF analyst Eric Balchunas said that investors with a well-balanced portfolio can absorb the risk of investing in new tech.

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Finance Reporter
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Reviewed by: etf.com Staff
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Edited by: James Rubin

Investors in Nvidia Corp. and other AI-touching companies have earned as high as triple digit returns. But some investors are already pondering how long the good times can last.

In an etf.com webinar March 12, Bloomberg Senior ETF Analyst Eric Balchunas and Head of Portfolio Management at Vident Rafael Zayas said that volatility is inevitable when investing in a novel technology and shouldn’t necessarily concern well-diversified investors.

AI is not just a fad, but a long-term investment trend, despite the fact there will likely be challenges for investors, Balchunas said during the Future of AI webinar.

Balchunas explained that for investors who have a solid 60/40 portfolio overall, taking on some risk is part of investing in emerging tech. “The 60/40 is a cure for volatility nerves,” Balchunas explained. 

“We can benefit speculating because we’re not going to get shaken out when there’s a little volatility, because if you want to capture a theme, you’re going to take on some volatility,” he added.

Zayas noted that because many people are aware and tend to be more cognizant of overhyping a sector and creating a bubble, there likely won’t be as many investors feeling the pain if they are expecting some tumult. “There will still be bubbles, but there’s a lot more conversation about this question than there is just cheerleading,” he added.

The stock market rally of the past year has been largely driven by AI excitement caused by a variety of consumer-facing generating AI chatbots hitting the market. The so-called “Magnificent Seven” drove the market into a bull phase and helped push the S&P 500 index to a record level this year. The group of seven stocks, which include Nvidia Corp., Meta Platforms Inc., Apple Inc. compose about a quarter of the value of the 3,700 or so publicly traded U.S. companies.

Nvidia, the leading chipmaker powering the AI software that operates platforms such as Chat GPT, in particular has benefited from the current interest in AI. The stock is up 270% over the past year, and just in 2024 is up 85%, according to Yahoo Finance data.

AI ETFs

Thematic ETFs that include software and hardware stocks that benefit from the AI boom can be a less volatile way to invest in AI long-term, Balchunas suggested, noting that  these ETFs are more resilient than other thematic ETFs.

“They have done something fascinating, which you rarely see,” he said. “They’ve gotten a third bite at the apple, when normally you can’t even get a second bite at the apple.”

He explained that there have been three distinct cycles of outflows from the group of AI thematic ETFs, but each time investors have flocked back when AI stocks started performing well. Now, AI thematic ETFs are leading all themes in inflows, Balchunas said.

The largest AI ETF is the $2.8 billion Global X Robotics & Artificial Intelligence ETF (BOTZ), which is up 40% over the past year and 14% year to date, according to etf.com data.

Contact Lucy Brewster at [email protected].

Lucy Brewster is a finance reporter at etf.com covering asset managers, emerging technologies, and regulation. She hosts etf.com webinars and appears on Exchange Traded Fridays, etf.com’s flagship podcast. She previously was a finance fellow at Fortune Magazine where she covered markets, investment strategy, and venture capital. She has also been a freelancer writer at the publication Mergers & Acquisitions and a research fellow at the Historic Hudson Valley. 

She graduated from Vassar College in 2022 with a degree in History and was an editor of The Miscellany News, the college's award winning student run newspaper. 

Lucy lives in Brooklyn, NY, and in her free time she loves to run and find new recipes to cook.