According to an analysis from The Washington Post, more than 1,000 publicly traded companies mentioned artificial intelligence (AI) in their recent quarterly earnings calls with investors. That number has increased almost 30-fold since a decade ago.
The AI industry is still in its infancy, but the technology is projected to add anywhere between $13 trillion and $200 trillion to the global economy by 2030, depending on which estimates you rely upon. With that much potential opportunity to tap into, it's little wonder so many companies are racing to incorporate AI into their operations.
If you are interested in tapping into the AI boom yourself through stock investment, how do you pick the long-term AI winners and losers from such a large number of companies? Maybe you don't have to.
Exchange-traded funds might be your best bet
An exchange-traded fund (ETF) is a passive investing tool designed to give investors exposure to an entire sector of the market through just one security. Put simply, rather than buying several individual stocks for your portfolio, you can buy one or two ETFs to reflect your strategy. Since ETFs can hold dozens or even hundreds of stocks, they tend to be somewhat diversified and offer a more conservative risk profile than buying individual stocks.
A handful of ETFs have popped up over the last few years with a specific focus on AI stocks, and they present investors with a great way to get involved in this emerging industry without the risk of picking individual winners and losers.
Below, I'll share two AI ETFs that could help you benefit from the AI revolution.
Image source: Getty Images.
1. First Trust Nasdaq Artificial Intelligence & Robotics ETF
The First Trust Nasdaq Artificial Intelligence & Robotics ETF (ROBT 1.08%) is a great choice for conservative investors, because it holds 109 stocks, making it one of the most diverse options in the AI category. The ETF invests in the enablers, engagers, and enhancers of the AI industry:
- Enablers include companies developing the hardware for AI. Chip producers like Nvidia fall into this category.
- Engagers develop products on top of that hardware. A software company like Microsoft is a good example.
- Enhancers can be any business using AI to serve customers even if it's not a direct part of its revenue. A social media specialist like Meta Platforms fits the bill, because it uses AI to recommend content to its users on Facebook and Instagram.
While this ETF is invested in over 100 companies, its portfolio is heavily weighted toward its top 10 holdings, which together account for 19.3% of its total value. Interestingly, none of the popular names investors would normally associate with AI are in this ETF's top 10. Instead, the list includes stocks like AeroVironment, which makes unmanned military vehicles, and UiPath, a software company that develops robotics automation software.
NASDAQ: ROBT
Key Data Points
The ROBT ETF does own popular AI stocks like Nvidia, Microsoft, Amazon, and Tesla, but these stocks each fall in the bottom half of its portfolio in terms of weighting. As a result, the ETF has only generated a return of 11% in 2023, so it hasn't maximized the roaring upside in stocks like Nvidia and Tesla. However, it does offer investors a conservative way to play the AI boom thanks to its exposure to so many different ways this emerging technology can be applied in the future.
If you want an ETF that is a little more concentrated, read on.
2. Global X Autonomous & Electric Vehicles ETF
Self-driving cars were a pipe dream not too long ago, but there are now several companies competing to bring them to market, and that wouldn't be possible without AI. The Global X Autonomous & Electric Vehicles ETF (DRIV +1.04%) holds just 75 stocks centered around that theme, so it's far more concentrated than the ROBT ETF.
Not only is the Global X ETF concentrated overall, but it's also heavily weighted toward its top 10 holdings, which account for 28.6% of the value of its total portfolio. And unlike the ROBT ETF, the Global X top 10 includes practically all of the AI names investors are familiar with:
|
Stock |
Global X Autonomous & Electric Vehicle ETF Weighting |
|---|---|
|
1. Alphabet (Google) |
3.64% |
|
2. Toyota Motor |
3.49% |
|
3. Apple |
3.19% |
|
4. Nvidia |
3.15% |
|
5. Tesla |
3.07% |
|
6. Intel |
2.92% |
|
7. Honeywell International |
2.60% |
|
8. Qualcomm |
2.49% |
|
9. Microsoft |
2.14% |
|
10. Honda Motor |
1.96% |
Data source: Global X ETFs. Holdings are as of Sept. 26, 2023, and the weighting levels are subject to change.
Electric car manufacturers like Toyota, Tesla, and Honda are obvious picks for this ETF, but what some investors might not know is that Alphabet is the parent of autonomous vehicle company Waymo, and Nvidia has its own autonomous vehicle platform called DRIVE. Plus, rumors continue to swirl about Apple's plans to enter the car industry.
NASDAQ: DRIV
Key Data Points
The ETF also holds small positions in companies that make up the electric vehicle supply chain, including lithium miners and refiners.
The Global X ETF has delivered a return of 18% this year, which is far better than the ROBT ETF. But it would have been even better if not for holdings like Lucid Group and Plug Power, which are trading deeply in the red thus far in 2023.
This ETF is great for investors who want exposure to a specific industry that is being completely transformed by AI. However, while its concentrated portfolio could deliver strong returns in the long run, it also presents heightened risk. Autonomous driving technology is rapidly improving but it isn't widely deployed just yet. If it fails to achieve mainstream adoption, or if it gets hampered by regulators, many of the stocks held by this ETF could be crushed.
That's an important point to keep in mind before buying in.
