One of the hottest areas for investors at the moment is artificial intelligence (AI). While the technology has existed in various capacities for decades, applications in areas such as cloud computing, workplace automation, and e-commerce have businesses moving quickly to integrate AI across their organizations.
If you're an investor, odds are that you've been bombarded by headlines featuring the "Magnificent Seven" stocks -- a moniker used to capture the biggest names in AI: Microsoft, Apple, Amazon, Alphabet, Nvidia, Meta Platforms, and Tesla.
While choosing among megacap tech stocks presents a good way to gain exposure to AI, some investors may prefer a more passive approach. Moreover, savvy investors understand that AI is being developed by many enterprises outside of the Magnificent Seven cohort.
The WisdomTree Artificial Intelligence and Innovation Fund (WTAI 0.13%) is an exchange-traded fund (ETF) that holds some of the most influential names in AI. Let's dig into the fund and assess why it may be a good opportunity for investors seeking a passive approach to the hottest ticket on Wall Street.
NYSEMKT: WTAI
Key Data Points
Why is everyone so interested in artificial intelligence?
Forecasts surrounding the addressable market for AI have a wide range. Statista estimates that the AI market will grow at a compound annual growth rate of roughly 16% between 2024 and 2030 -- resulting in a market of $738 billion. Meanwhile, Bloomberg reports that generative AI could reach a market size of $1.2 trillion by 2032.
I see these market-size forecasts as largely a fun exercise in numbers. The more important theme is that AI is expected to grow at a fast rate over the next several years, making the space interesting to growth investors in particular.
Image source: Getty Images.
A diversified fund, but a few items to note
What makes the WisdomTree Artificial Intelligence and Innovation Fund interesting is that it holds stocks in several different end markets -- each of which is ripe to use AI to launch to new levels. For example, the ETF holds positions in companies that develop AI software for machine learning or natural language processing (NLP), semiconductors, and even AI-powered hardware applications in drones or self-driving vehicles.
Some of its largest holdings are Advanced Micro Devices, CrowdStrike, and Magnificent Seven members Meta Platforms, Microsoft, and Alphabet. A unique feature of the WisdomTree Artificial Intelligence and Innovation Fund is that even though the fund specifically focuses on AI, its holdings touch many different sectors, so that investors still achieve some level of diversification and risk mitigation.
The ETF also has positions in some stocks that have had a rough go in recent history. Gaming company Unity Software is a top position, a stock that is down roughly 20% in the past year. Additionally, semiconductor companies Qualcomm and Arm Holdings are both major positions. While each of these stocks has enjoyed a run-up in recent months, I suspect that this is due to enthusiasm surrounding AI and chips in general -- as both companies are far smaller operations compared to that of Nvidia, and each is in the midst of a turnaround from an operating standpoint.
Is this WisdomTree Artificial Intelligence and Innovation Fund right for you?
One of the most important items to look at when choosing an index fund is the inception date. This will tell you how long the fund has been trading. It's an important thing to consider because it can shed light on the fund's performance over a multiyear period.
Given that the WisdomTree Artificial Intelligence and Innovation Fund has only been around since December 2021, there isn't a ton of data to digest. Moreover, 2022 was an abysmal year for tech stocks in particular, while 2023 witnessed an outsize rebound -- with the Nasdaq Composite surging over 40%.
This dynamic makes the returns for the WisdomTree Artificial Intelligence and Innovation Fund a little challenging to decipher. An important thing to keep in mind is that you don't have to do anything after you buy shares of the fund. The fund's managers change its holdings without requiring you to do any due diligence or research whatsoever.
This is where long-term thinking comes in handy. While use cases for AI are unfolding and the potential size of the market is ever-evolving, the consensus seems to be that AI will generate meaningful growth for at least the next several years. For this reason, funds that specialize in AI exposure could end up generating returns superior to that of the S&P 500 on a consistent basis.
An important caveat to note is that weightings for positions matter in ETFs. So while the WisdomTree Artificial Intelligence and Innovation Fund holds positions in several terrific businesses, the fund's overall return since inception may be a bit muted due to the weightings of some of its larger holdings.
If you're eyeing this ETF, also note that one of the most prudent strategies for investing in index funds is making a monthly contribution. Although it may not seem like much at the time of investment, consistent contributions can lead to generational wealth over a long-term time horizon thanks to the power of compounding.
I like that this fund offers investors exposure to smaller, perhaps overlooked AI developers and even explores options in companies that primarily operate overseas. However, while I understand that the ETF is clearly trying to build a portfolio that isn't hyper-concentrated in just big tech, I think some of the fund's positions in current market leaders need to be more of a prominent fixture.
I see the WisdomTree Artificial Intelligence and Innovation Fund as a lower-risk opportunity for investors looking to gain exposure to AI, but are overwhelmed by the process of choosing individual stocks. The robust secular outlook for AI and its ability to disrupt myriad markets could make investing in the space a lucrative option for investors with a long-term time horizon.
