Ai Etf Investment: Strategies For Success

Artificial intelligence (AI) is one of the biggest trends of the 2020s, with the potential to contribute trillions to the global economy by the end of the decade. AI stocks and funds are a great way for investors to try to profit from the growth of AI technology. AI-focused exchange-traded funds (ETFs) provide exposure to a broad range of the best AI companies, so you don't need to research and choose individual stocks on your own.

AI ETFs are tradable baskets of AI stocks, which are shares of companies that work on AI development. There are several options for investors looking to diversify into AI, including broad technology ETFs, AI-specific thematic ETFs, and AI-powered active trading ETFs.

- Qraft AI Enhanced US Large Cap Momentum ETF (AMOM)

- First Trust Dow Jones Internet Index Fund (FDN)

- Invesco NASDAQ Internet ETF (PNQI)

- iShares U.S. Technology ETF (IYW)

- Neuberger Berman Disrupters ETF (NBDS)

- Fidelity MSCI Information Technology Index ETF (FTEC)

- Invesco AI and Next Gen Software ETF (IGPT)

- ROBO Global Artificial Intelligence ETF (THNQ)

- Global X Artificial Intelligence & Technology ETF (AIQ)

- Global X Robotics & Artificial Intelligence ETF (BOTZ)

- iShares Global Tech ETF (IXN)

- Defiance Quantum ETF (QTUM)

- Qraft AI Enhanced US Large Cap ETF (QRFT)

- Franklin Exponential Data ETF (XDAT)

- iShares U.S. Consumer Focused ETF (IEDI)

Diversification in AI ETFs

Diversification is key when investing in AI ETFs, especially considering the AI market is still in its early stages of development. Thematic investing is a strategy that focuses on long-term potential rather than short-lived fads, making it an attractive approach for forward-thinking investors.

AI ETFs provide exposure to a range of companies that are leaders in AI innovation, but the specific types of AI companies that ETFs invest in can vary. These companies can be categorized as enablers, engagers, and enhancers:

• Enablers: These companies supply core components for AI development, such as semiconductors or cloud computing infrastructure. Examples include Nvidia, Taiwan Semiconductor, and Microsoft.
• Engagers: Engagers incorporate AI technology into their core products. For instance, Darktrace, a cybersecurity company, uses machine learning for improved threat detection and response.
• Enhancers: Enhancers contribute to the AI ecosystem without directly selling AI solutions. Tencent Holdings, a streaming entertainment and online advertising company, is an example of an enhancer. They use AI to predict the popularity of gaming and content topics.

AI ETFs may include one, two, or all three types of these AI stocks, depending on the ETF's strategy. Many also combine AI stocks with robotics companies due to the close relationship between the two fields.

When investing in AI ETFs, it is important to consider the level of diversification within the fund. Some ETFs may focus primarily on large-cap tech stocks, while others may offer a more balanced mix of small, medium, and large companies across the value and growth spectrum. Additionally, some ETFs may have a stronger U.S. focus, while others may provide exposure to companies from various countries and regions.

• Vanguard Information Technology ETF (VGT): This ETF has a strong presence in large-cap tech stocks, including Microsoft, Nvidia, and Apple.
• SPDR S&P Kensho New Economies Composite ETF (KOMP): This ETF departs from the focus on mega-cap tech stocks, providing exposure to companies like Leidos Holdings, Coinbase, and Teledyne Technologies.
• IShares Robotics and AI Multisector ETF (IRBO): IRBO includes companies that either enable or use robotics and AI technologies, with no single stock comprising more than 3% of the portfolio.
• Global X Artificial Intelligence & Technology ETF (AIQ): AIQ offers comprehensive exposure to the AI value chain, with a globally diversified portfolio that includes companies like Alibaba Group Holdings, Oracle Corp., and Meta Platforms.
• Defiance Quantum ETF (QTUM): QTUM focuses on companies that enable quantum computing, including hardware, connectivity solutions, and big data management.

Thematic investing

AI-themed ETFs offer a more direct and concentrated exposure to this cutting-edge technology by utilizing proprietary methodologies and indexes specifically designed to capture companies that are leaders in AI innovation. These funds are an attractive strategy for forward-thinking investors as they focus on the long-term potential of a trend rather than short-lived fads.

• Diversification: As the AI market is still in its early stages, diversification is crucial. AI-themed ETFs can provide exposure to a range of companies across different geographies and stages of development.
• Long-Term Potential: Thematic investing in AI focuses on the long-term impact of this technology rather than short-term gains. It is a strategy for investors who believe in the transformative potential of AI in the global economy.
• Identifying Leaders: AI-themed ETFs are designed to identify and invest in companies that are at the forefront of AI innovation. These companies may be leaders in fields such as robotics, automation, natural language processing, and autonomous vehicles.
• Proprietary Methodologies: AI-themed ETFs use proprietary methodologies and indexes to evaluate companies' relevance to AI. This includes analysing revenue, profit, and R&D investment in AI technologies, as well as screening for approved patents in AI-related fields.
• Risk Management: While AI offers significant potential, it also carries risks. Thematic investing helps manage these risks by diversifying investments across companies and geographies, making it easier to weather any volatility or setbacks in specific AI applications or companies.
• Due Diligence: When investing in AI-themed ETFs, it is important to do your due diligence. Research the underlying holdings of the ETF, its expense ratio, and the track record of the fund provider.
• Long-Term Horizon: Thematic investing in AI is typically a long-term strategy. AI technology is still evolving, and it may take time for its full potential to be realized and for investments to bear fruit.
• Complementary Strategies: Consider combining thematic investing in AI with other investment strategies. For example, you could invest in broad technology ETFs that hold AI-focused companies or use AI-powered active trading ETFs that use AI to inform their trading decisions.
• Staying Informed: Keep yourself updated on the latest developments in the field of AI. Stay informed about the performance of AI companies, the impact of AI on different industries, and the regulatory environment surrounding AI.
• Professional Guidance: Consult financial advisors or experts in the field of AI investing to gain additional insights and make more informed investment decisions.

AI-powered active trading ETFs

• QRAFT AI-Enhanced US Large Cap ETF (QRFT)
• Qraft AI-Enhanced U.S. Large Cap Momentum ETF (AMOM)
• WisdomTree U.S. AI Enhanced Value Fund
• WisdomTree Artificial Intelligence and Innovation Fund
• Amplify AI Powered Equity ETF
• WisdomTree International AI Enhanced Value Fund

AI-powered funds have the potential to be game-changing, but they also have some drawbacks. One benefit is that they may be able to replace a team of stock analysts, reducing the expense ratio of the funds and lowering the cost for investors. Additionally, if an AI-powered fund is well-managed and programmed, it may be able to outperform the market.

However, there are also potential downsides to consider. Many AI-powered funds have a limited track record, having only been in existence for a year or two. As a result, their ability to deliver good returns is unclear. Investors should compare the performance of these funds with a basic S&P 500 index fund, which has a long-term track record of about 10% average annual returns.

Another potential issue is that AI funds may have low assets under management, indicating a lack of interest in the fund. This can make it more difficult to exit the fund without impacting the price. Furthermore, a small fund may have a higher expense ratio due to having fewer assets to spread its costs over, resulting in higher ongoing costs for investors.

AI stocks vs AI ETFs

Overview

AI stocks and ETFs are both investment options that offer exposure to the artificial intelligence sector, but they have distinct characteristics and risks that investors should consider. AI stocks provide direct ownership of companies working in the AI space, while ETFs offer a more diversified approach by bundling multiple AI-related stocks into a single fund.

AI Stocks

AI stocks are shares of individual companies that are directly involved in the development and application of artificial intelligence. These companies can vary widely in terms of their products, services, and business models. Some AI companies create voice recognition software, while others develop pilotless aircraft or focus on medical robotics solutions. Investing in AI stocks can offer the potential for higher returns but also carries a higher level of risk. It requires taking on a significant amount of upfront expense and research work to identify the right investment opportunities.

AI ETFs

AI exchange-traded funds (ETFs) are baskets of AI stocks that are traded on stock exchanges. They provide investors with a more diversified way to gain exposure to the AI sector. ETFs can include a mix of large technology companies that have invested in AI, as well as smaller companies solely focused on AI development. By investing in an AI ETF, investors benefit from the expertise of the fund managers who select and manage the portfolio of AI-related stocks. ETFs also offer lower expense ratios, making them a more cost-effective option compared to purchasing individual AI stocks.

Key Differences

The main difference between AI stocks and ETFs lies in their level of diversification and risk. AI stocks represent a single company, so the success of the investment depends entirely on the performance of that specific company. In contrast, AI ETFs provide exposure to a basket of AI-related companies, reducing the impact of any single stock on the overall investment. This diversification helps to lower the overall risk of the investment. Additionally, AI ETFs often have lower expense ratios than purchasing individual stocks, making them more accessible to investors with limited funds.

Both AI stocks and ETFs offer investment opportunities in the artificial intelligence sector. AI stocks are suitable for investors seeking higher potential returns and who are comfortable with taking on more risk. On the other hand, AI ETFs provide a more diversified and cost-effective approach, making them a more conservative option for those who want to benefit from the growth of AI without taking on too much risk. Ultimately, the decision between investing in AI stocks or ETFs depends on the investor's risk tolerance, investment goals, and financial situation.

Best AI ETFs for 2024

Investing in artificial intelligence (AI) can be challenging due to the difficulty of identifying which business models will thrive in this new era of technological innovation. AI exchange-traded funds (ETFs) can mitigate this risk by offering diversified exposure to a broad basket of AI companies.

• Global X Robotics and Artificial Intelligence ETF (BOTZ): This ETF offers exposure to companies poised to benefit from increased adoption of AI, industrial and healthcare robotics, and automation. BOTZ has a decent track record dating back to 2016, a low dividend yield for tax efficiency, and a higher expense ratio.
• IShares Future AI and Tech ETF (ARTY): ARTY emphasizes semiconductor and software companies with AI involvement and offers global diversification. It has a lower expense ratio than BOTZ but is overly concentrated in US equities.
• Global X Artificial Intelligence and Technology ETF (AIQ): AIQ has a stronger focus on AI than BOTZ, with more holdings and global diversification across developed and emerging markets. It has a low dividend yield for tax efficiency but a relatively high expense ratio and lower allocation to sectors outside of technology.
• First Trust Nasdaq Artificial Intelligence and Robotics ETF (ROBT): ROBT provides higher exposure to AI engagers and is globally diversified. It has a low dividend yield for tax efficiency but a high expense ratio, a complex index methodology, and equal-weight methodology that may reduce gains from large-cap AI stocks.
• WisdomTree Artificial Intelligence and Innovation Fund (WTAI): WTAI has the lowest expense ratio on this list and focuses on AI rather than robotics or automation. It has a low dividend yield for tax efficiency but a lower AUM, is mostly concentrated in US stocks, and has a high allocation to tech stocks.
• Roundhill Generative AI and Technology ETF (CHAT): CHAT is the newest ETF on this list, having debuted in May 2023. It offers high exposure to large-cap US tech stocks, a pure-play generative AI focus, and global diversification. However, it has a high expense ratio, and some investors may not prefer an actively managed ETF.

Other Considerations:

• Vanguard Information Technology ETF (VGT): While not a dedicated AI ETF, VGT includes large-cap tech stocks with some level of AI involvement, such as Microsoft, Nvidia, and Apple.
• Fidelity MSCI Information Technology Index ETF (FTEC): FTEC is another broad tech ETF with exposure to mega-cap tech stocks and semiconductor companies.
• SPDR S&P Kensho New Economies Composite ETF (KOMP): KOMP departs from the focus on mega-cap tech stocks, including companies like Leidos Holdings, Coinbase, and Teledyne Technologies.
• Invesco AI and Next Gen Software (IGPT): This ETF tracks the STOXX World AC NexGen Software Development Index, focusing on companies that earn direct revenue from supporting software development.

Key Things to Keep in Mind:

• Diversification: AI is still in the early stages of development, so diversification is key. Consider your overall investment strategy and how AI ETFs fit into your portfolio.
• Costs and Fees: AI ETFs typically have higher fees than broad market ETFs. Evaluate the expense ratios and consider the potential impact on long-term returns.
• Risk and Volatility: AI stocks can be sensitive to market shifts and regulatory changes. Understand the risks involved and ensure that any AI investments align with your risk tolerance.
• Long-Term Potential: Consider whether you're investing at the start of a multi-year trend or at the peak of a hype-fueled fad. Evaluate future growth expectations and their potential impact on stock prices.

Frequently asked questions