AI's Taking Over the World. There Are ETFs for That

Artificial intelligence is the hottest investment theme in the markets today. ChatGPT, Midjourney and other AI-powered applications have captivated peoples’ imaginations, while pushing up stocks of AI-related companies.  

In fact, you could say that we haven’t seen such enthusiasm about a new technology since, well, 2021—when blockchains, electric vehicles and other tech were all the rage.  

But that was a bubbly environment. Today’s AI mania is taking place at a time in which investors are much less inclined to buy into pie-in-the-sky stories that could take years to play out. 

AI is different. It’s a technology that’s on a rapid upward trajectory, and it’s revolutionizing everything from media to transportation to health care today.  

Yet that doesn’t mean every investor should rush into AI stocks. As 2022 taught us, the price investors pay for a stock matters.  

Some have started to question the valuation of stocks like Nvidia Corp., the world’s largest producer of GPUs (chips that enable the complex computations that are needed for AI and machine learning applications). Shares of the company are up 90% so far this year.  

If you’re reading this, then picking and choosing which stocks to buy and when to buy them probably isn’t something you’re interested in doing. Instead, investing in AI through a basket approach—with exchange-traded funds—might make more sense.  

Broad Exposure  

Most broad technology ETFs hold stocks that are involved in AI in some shape or form. The largest tech companies—Alphabet Inc., Meta Platforms Inc., Microsoft Corp. and yes, Nvidia—are all making heavy investments in their AI capabilities.  

An investment in something like the iShares U.S. Technology ETF (IYW) will likely capture at least some of the upside from those investments.  

IYW, which has a 0.39% expense ratio and tracks the Russell 1000 Technology RIC 22.5/45 Capped Index, is unique in that it’s a broad tech ETF that holds Apple Inc., Microsoft, Alphabet, Nvidia, and Meta. 

Sometimes those stocks are split into separate sectors, like in the case of ETFs that follow the Global Industry Classification Standard.  

For instance, the Technology Select Sector SPDR Fund (XLK) doesn’t hold Alphabet or Meta; instead, you’ll find them in the Communication Services Select Sector SPDR Fund (XLC). 

Targeted ETFs  

For investors looking for more targeted exposure to AI stocks, a handful of funds seek to provide that. These funds often lump AI together with robotics to create broader “autonomous tech” ETFs. 

Examples include the Global X Robotics & Artificial Intelligence ETF (BOTZ), the ROBO Global Robotics & Automation Index ETF (ROBO), the ARK Autonomous Technology & Robotics ETF (ARKQ), the iShares Robotics and Artificial Intelligence Multisector ETF (IRBO) and the First Trust Nasdaq Artificial Intelligence & Robotics ETF (ROBT). 

With the exception of ARKQ, all of these are index-based ETFs. ROBO, IRBO and ROBT are equal-weighted, while BOTZ is market-cap-weighted. 

The portfolio composition of these ETFs can vary quite significantly, and by extension, so can their returns. 

Over the past year, returns have ranged from a loss of 30% to a loss of 8.5%.  

On a five-year basis, returns have ranged from 10% to more than 55%. 

Past performance is no guarantee of future results, so investors would be well-served to look closely under the hood at each of these ETF’s strategies and holdings. 

Our ETF comparison tool is a great resource to help you do that.  

Email Sumit Roy at [email protected] or follow him on Twitter @ sumitroy2