By Lori Ioannou
To a starry-eyed investor, it seems like one of the market's best bets: ETFs that buy stocks of AI companies.
Yet when shopping for one of the exchange-traded funds that focus on the sizzling tech-stock subsector of artificial-intelligence shares, investors should be aware that funds have different definitions of AI. And they have different criteria for how they choose their stockholdings.
Some AI ETFs -- such as the $304 million iShares Robotics & Artificial Intelligence Multisector ETF $(IRBO)$ -- are passively managed and track an index that is equally weighted (meaning every stock in the index gets the same percentage of investment, whether it's a large-cap or a small-cap company).
Others, like TrueShares Technology, AI & Deep Learning ETF $(LRNZ)$, a $21.9 million actively managed fund, use an actively managed approach and choose holdings based on proprietary market research. (The fund is the top performer among AI ETFs this year through May 31, with a 35% total return, and a 12-month return of 12%.)
"Look for thematic purity," says Morningstar analyst Kenneth Lamont. "Make sure the fund invests in bellwether stocks well-positioned to benefit from AI industry trends in the months and years ahead." Also look at the fund's fees, he says. Expense ratios for AI ETFs range from 0.45% to 0.69%, according to Morningstar Direct.
Investors should keep in mind that these funds invest in tech growth stocks that can be highly volatile. The soaring stock of Nvidia, the graphics-chip maker, is a top holding of the AI funds, and they are benefiting from that company's 169% skyrocket this year. "While there is more volatility, there is greater upside potential in this tech growth sector," says Michael Loukas, chief executive of TrueMark Investments. "Investors have to be willing to stay the course, realizing this is a long-term thematic play."
Keep it limited
For this reason, some investment strategists and financial advisers suggest investors allocate no more than 10% of their thematic investment allocation to AI ETFs.
"Consider it rocket fuel for a small portion of your portfolio," says Loukas.
AI funds invest at least 25% of their portfolio in companies involved in products, technology or research related to AI. Some even use artificial intelligence to help select stocks for their portfolios.
There are at least eight AI ETFs, with total assets of more than $3 billion, according to Morningstar Direct. The most recent entrant is Roundhill Generative AI & Technology ETF $(CHAT)$, launched on the NYSE Arca exchange on May 18. The actively managed $22 million fund focuses on generative AI, a rapidly evolving field in which computer algorithms are used to generate outputs that resemble human-created content such as text, graphics or music. In addition to generative-AI software companies, the fund invests in companies that provide the infrastructure for generative AI -- including semiconductor, server and networking providers -- and in companies building platforms that others will be able to use to build generative-AI applications.
Hype and enthusiasm
"The hype around OpenAI's ChatGPT, a conversational AI bot that can generate text, images and other media in response to prompts, has really driven investor enthusiasm," says Jeff Spiegel, U.S. head of iShares megatrend, international and sector ETFs at BlackRock. "We are witnessing a rapid adoption of a technology that has applications across a wide range of industries, from automotive and robotics to financial services and 3-D printing," he says.
Global spending on artificial-intelligence systems -- including software, hardware and services -- will reach $537 billion in 2023, up 19.5% from last year, and is expected to grow to about $900 billion by 2026, according to market-research firm IDC.
The TrueShares fund invests in a portfolio of 20 to 30 companies that are users of AI and deep learning in a range of industries, from cybersecurity to life sciences to systems management.
The No. 2 performer behind TrueShares this year is Global X Robotics & Artificial Intelligence ETF $(BOTZ.UK)$, a $2.1 billion fund that invests in companies that stand to benefit from the adoption of robotics and AI, including those involved with industrial robotics and automation, nonindustrial robots and autonomous vehicles. The fund is up 32.4% for the year to date through May 31, with a 12-month return of 14.7%.
Global X Artificial Intelligence & Technology ETF $(AIQ.UK)$, a $219.7 million fund that tracks the INDXX Artificial Intelligence and Big Data Index of 85 stocks, is up 29.3% year to date through May 31 and 15.2% in the past 12 months.
Anything can happen
But the bottom line is that investors need to be aware of the risks of this developing industry, says Morningstar's Lamont.
"There could be significant regulatory or legal restraints that slow the adoption of generative AI in the months ahead," Lamont says. "World-changing technologies don't always play out the way we imagine."
Lori Ioannou is a writer in New York. She can be reached at reports@wsj.com.
(END) Dow Jones Newswires
June 03, 2023 09:00 ET (13:00 GMT)
Copyright (c) 2023 Dow Jones & Company, Inc.
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