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There's an ETF for That? The 3 Best ETFs for Investing in Artificial Intelligence

Published 03/01/2024, 09:34 AM
Updated 07/17/2023, 03:51 PM

The term "AI Spring" is increasingly used to describe the current wave of breakthroughs in artificial intelligence.

This period is highlighted by significant advancements across various AI sub-fields, such as machine learning, natural language processing, computer vision, robotics, and autonomous vehicles. These developments are driving unprecedented changes in industries and creating new opportunities for businesses and economies worldwide.

Investors have witnessed spectacular results from companies focused on AI, with giants like Microsoft (NASDAQ:MSFT), Nvidia, and Meta (NASDAQ:META) Platforms setting new records and reporting impressive earnings. These firms are pushing the boundaries of what's possible with AI, impacting both the consumer and enterprise sectors.

However, the rapidly evolving nature of the AI sector means that picking the eventual winners is fraught with uncertainty. The dot-com bubble, for instance, revolutionized internet infrastructure, yet investors who bet on companies like Cisco (NASDAQ:CSCO) during its peak faced dismal returns.

Given this backdrop, it might be wise for investors to consider diversifying their exposure to the AI theme rather than betting on individual companies. For instance, while Alphabet (NASDAQ:GOOGL)'s AI venture, Gemini, has received a lukewarm reception, the broader AI market continues to thrive.

The ETF Central Screener is a tool that can help investors find AI-related ETFs by filtering for the "AI and Big Data" theme. Among the available options, I think three ETFs particularly stand out for their focus on artificial intelligence. Here's a close look at them.

Invesco AI and Next Gen Software ETF (IGPT)

IGPT tracks the STOXX World AC NexGen Software Development Index, which is focused on selecting companies based on their revenue sources, particularly those with significant exposure to next-generation software development.

By utilizing Revere Revenue datasets (RBICS) for a detailed breakdown of revenue sources, IGPT aims to invest in companies that are genuinely advancing or benefiting from artificial intelligence and next-generation software technologies.

This approach is designed to ensure that IGPT is not just another "closet tech growth fund," referring to an investment fund that, while purportedly focused on a specific theme or sector, in practice, ends up heavily invested in large, well-known tech companies, thus mirroring the broader tech sector's growth trends rather than providing targeted exposure.

The current portfolio of IGPT shows a significant orientation towards large-cap growth stocks, with top holdings including Nvidia Corp (NASDAQ:NVDA), Meta Platforms Inc, Advanced Micro Devices (NASDAQ:AMD) Inc, Alphabet Inc, Adobe (NASDAQ:ADBE) Inc, Qualcomm (NASDAQ:QCOM) Inc, Intuitive Surgical Inc (NASDAQ:ISRG), and Intel Corp (NASDAQ:INTC). This lineup underscores the ETF's focus on major players in the tech industry that are at the forefront of AI and software development.

Investors in IGPT are subject to a 0.60% net expense ratio, which is a measure of the fund's operational costs as a percentage of its assets. Despite these costs, the ETF is noted for its tax efficiency, evidenced by a -0.03% 30-day SEC yield, but investors shouldn’t be alarmed.

A negative yield in this context can occur when the fund's expenses outweigh the income generated from its investments over a short period, a situation that may not significantly impact long-term investors focused on capital appreciation within the rapidly evolving AI sector.

Roundhill Generative AI & Technology ETF (CHAT)

Investing in AI may benefit from a high-conviction, focused approach, characterized by a high active share. Active share refers to the degree to which a fund's portfolio differs from the benchmark index.

Funds with a high active share make unique investment choices, diverging significantly from the market index, which can be especially beneficial in rapidly evolving sectors like AI where differentiation and insight can lead to superior returns.

The field of AI that most investors currently have experience with is generative AI, which focuses on creating new content, whether it be text, images, speech, videos, or even code, that resembles human-generated content. Examples include ChatGPT, Dall-E, and Sora.

For investors seeking exposure, CHAT is a possible option. This actively managed ETF currently maintains a portfolio of 43 holdings, each carefully selected for their direct involvement in generative AI. Names include Nvidia, Microsoft (who owns OpenAI), Meta Platforms, and Alphabet.

However, one major consideration for investors is the ETF's expense ratio. At 0.75%, CHAT's fees are on the higher side, reflecting the cost associated with active management and the specialized focus on a thematic strategy.

iShares Robotics and Artificial Intelligence Multisector ETF (IRBO)

Finally, for those who lean towards the "buy the haystack" approach to investing in artificial intelligence, seeking broader diversification and lower expenses, IRBO is a thematic AI ETF worth considering.

This ETF follows the NYSE FactSet Global Robotics and Artificial Intelligence Index, offering exposure to a diverse set of companies in the AI space. With 111 equally weighted holdings, it ensures that the investment is not overly concentrated in a few top names.

Additionally, with only 53% of its holdings based in the U.S., it provides a global perspective on the AI and robotics sectors. Finally, IRBO stands out as one of the more affordable thematic AI ETFs available, with an expense ratio of just 0.47%.

This content was originally published by our partners at ETF Central.

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