Artificial intelligence (AI) is the hottest technology of 2023, with many stocks in the emerging industry absolutely surging year to date:
- Nvidia stock has soared 220%.
- C3.ai stock has skyrocketed 261%.
- Tesla stock has jumped 165%.
- Microsoft stock has gained 44%.
But last year was a different story; many of these names suffered steep declines -- in some cases of 50% or more -- which is a reminder that big gains typically come with a higher degree of volatility. So what's the best way for investors with a more conservative risk profile to get involved in AI stocks?
Index funds are a cheap and often diversified way to capture the upside of an entire market. They allow investors to gain exposure to a basket of stocks neatly wrapped up in a single security that they can buy and sell in one transaction. This is often called passive investing.
Several AI-focused exchange-traded funds (ETFs) have hit the market over the last few years to give investors exposure to this emerging theme while limiting their risk. I'll discuss three of them below. Each has a unique set of characteristics, but they can all help investors capitalize on the AI boom.
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1. iShares Robotics and Artificial Intelligence Multi Sector ETF
The iShares Robotics and Artificial Intelligence Multi Sector ETF (IRBO 4.78%) is the most diverse fund of the three. It was established in 2018 and currently holds 113 different securities, none of which make up more than 1.39% of the fund's $476 million in total value. Most of those securities are stocks, and they're spread across AI developers and also the companies using the technology to serve consumers.
It features many popular AI names like Nvidia, Microsoft, Advanced Micro Devices, and Amazon, while also including stocks like Meta Platforms, Spotify, and Netflix, which are using AI to improve their users' experience.
The latter names are a great feature of this ETF because each has a proven business even without AI, so in the unlikely scenario the technology doesn't live up to the hype in the long run, their respective stocks will probably hold up just fine.
The IRBO ETF has delivered a return of 35% so far in 2023, which is nearly double the gain of the benchmark S&P 500 stock market index. It comes with an annual fee equivalent to 0.47% of the fund's assets under management, making it the cheapest of the three ETFs on this list. That fee is used to pay for staff, marketing, and distribution.
NYSEMKT: IRBO
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This is likely the best bet for investors wanting diverse exposure to AI and all the places in which it could be used.
2. First Trust Nasdaq Artificial Intelligence & Robotics ETF
The First Trust Nasdaq Artificial Intelligence & Robotics ETF (ROBT 2.93%) invests in the enablers, engagers, and enhancers of the AI industry. Enablers are companies building the hardware required for AI (like semiconductors), whereas engagers develop products and software on top of it. Enhancers can be any company using AI to serve customers, even if it's not core to their business.
The ROBT ETF holds 106 stocks. The fund is slightly more concentrated than IRBO, with several stocks accounting for more than 2% of its total market value of $409 million. In fact, its top 10 holdings make up a combined 21%. Interestingly, none of the mainstream stocks investors would normally associate with AI are in that top 10; the fund does hold Nvidia, Microsoft, Amazon, and Tesla, but they each represent less than 1% of the portfolio.
Some of its top holdings include Appian, an enterprise cloud company; Pegasystems, which offers low-code software development tools; and Palo Alto Networks, a global leader in AI-powered cybersecurity.
The fund has generated a return of 27.8% this year so it's comfortably ahead of the S&P 500. It has underperformed the IRBO ETF, though, mainly because it has less exposure to high-flying names like Nvidia. It will likely also offer less volatility over the long term as a result, so this could be a great way for more conservative investors to play the AI boom.
NASDAQ: ROBT
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But it's important to keep in mind it has a higher expense ratio equivalent to 0.65% of funds under management. That could eat away at more of the ETF's returns over time relative to IRBO.
3. Global X Autonomous & Electric Vehicles ETF
Many new technologies wouldn't be possible without AI, and self-driving software is one of them. The Global X Autonomous & Electric Vehicles ETF (DRIV 2.52%) holds 75 securities, many of which are focused around that theme.
It was established in 2018, and it's unique because it also owns positions in all of the major electric vehicle manufacturers, as well as in many companies that make up the supply chain, including lithium miners from countries like Australia.
It's the most concentrated ETF of the three I've presented. It's heavily weighted toward its top five holdings, which account for 22% of the portfolio's $928 million value. Those stocks are Nvidia, Tesla, Apple, Alphabet, and Toyota Motor. It's also the most expensive, with an annual fee of 0.68%; higher costs are typical in funds that offer more narrow, specialized portfolios.
The Global X Autonomous & Electric Vehicles ETF has delivered a return of 30% so far in 2023, which falls in the middle of the other two funds. Its holdings in companies like Nikola, Plug Power, and Lucid Group are weighing it down slightly because they're heavily underperforming the broader market this year.
NASDAQ: DRIV
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This ETF is ideal for investors who want specific, concentrated exposure to self-driving vehicle technologies and the electric vehicles that will feature them in the future. Owning it makes a lot of sense over the long term given the trends forming in the mobility space.
But keep in mind, a high concentration in these areas can also translate into more risk -- any regulatory challenges that negatively impact autonomous vehicles, for example, will likely hurt many of the stocks in this fund and result in an underperforming investment.
