Best AI ETFs

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Invest in the best AI ETFs with Interactive Brokers as your online brokerage.

Benzinga explains all there is to know about investing in AI ETFs. 

Artificial intelligence (AI) took unprecedented strides throughout 2022 and 2023, solidifying its position as a cornerstone of modern technological evolution. The rapid pace of advancements in this field has also resulted in renewed investor interest in adjacent technology industries like semiconductors, robotics and cloud computing. 

With advancements ranging from generative large language models such as ChatGPT and Google Bard, many believe AI to be the core driver of the fourth industrial revolution. Large technology companies like NVIDIA Corp. (NASDAQ: NVDA) have already reported stellar earnings reports with many successes attributable to growing AI demand. 

However, given the nascent nature of AI technology, identifying the right investment opportunities that offer the best value can be difficult. AI stocks can range from mature, blue-chip companies expanding into AI to small-cap start-ups looking for a path to profitable growth. With so many ways to invest, it can be easy for beginner investors to get overwhelmed. 

If you want to do more than just buy shares of NVIDIA or conduct due diligence and research on other picks, consider a thematic exchange-traded fund (ETF) that provides targeted, pure-play AI exposure. By buying an AI ETF, investors can outsource the stock-picking and portfolio management process to professional fund managers. 

Here’s all you need to know about investing in AI ETFs in 2023, with an overview of the most popular options on the market along with some answers to questions you may have. 

5 Best AI ETFs

Benzinga has provided a list of the top five AI ETFs currently trading on the market as determined by assets under management (AUM) as of June 1, 2023. AUM is a metric that measures the amount of money investors have poured into a particular ETF. In general, a higher AUM means that the ETF is more popular and less likely to be shut down.

Benzinga ensured that each of these thematic ETFs delivers pure-play exposure to the AI theme instead of just targeting general technology innovation or an AI-adjacent industry like semiconductors or robotics. Finally, Benzinga sets a cap for fees at an expense ratio of less than 1.00%, to ensure that investors get the best bang for their buck. 

1. ROBO Global Robotics & Automation ETF (NYSEARCA: ROBO)

With its inception date of Oct. 21, 2013, ROBO has been around for quite some time, accruing just over $1.4 billion in AUM as of June 1, 2023. This ETF tracks the proprietary Robo Global Robotics & Automation index, which currently sports 79 small, mid and large-cap holdings from 14 countries spanning both developed and emerging markets. 

Unlike some of the other AI-themed ETFs, ROBO does not feature as heavy of an allocation to large-cap tech stocks nor does it employ a market-cap weighted methodology. The ETF’s holdings are separated into two categories — AI application, which refers to companies that use AI and AI technologies, for companies that develop AI. ROBO charges a 0.95% expense ratio.

2. First Trust Nasdaq Artificial Intelligence and Robotics ETF (NASDAQ: ROBT) 

ROBT tracks the Nasdaq CTA Artificial Intelligence and Robotics Index, which employs a stringent set of screeners to ensure good AI exposure. To be eligible for this index, a stock must be classified as either an AI engager, enabler or enhancer as determined by the Consumer Technology Association (CTA), which is based on the nature of their AI involvement. 

Stocks in the fund are subject to minimum requirements for market cap, trading volume and free-float and scored based on their degree of involvement in the AI engager enabler, or enhancer categories. Engagers receive a 60% weighting, while enablers and enhancers receive 15%. Companies in each category are weighted equally. ROBT charges a 0.65% expense ratio. 

3. iShares Robotics and Artificial Intelligence Multisector ETF (NYSEARCA: IRBO)

IRBO tracks the NYSE FactSet Global Robotics and Artificial Intelligence Index. This index employs an equal-weighted methodology to hold a total of 116 globally based companies that could benefit from the long-term growth and innovation trends in robotics technologies and AI. The ETF has attracted around $345 million in AUM. 

IRBO’s main lure is its lower expense ratio, which is lower than the other ETFs on this list at 0.47%. Investors looking for exposure to the top mega-cap tech stocks like Nvidia and Meta Platforms Inc. (NASDAQ: META) will also like this ETF but keep in mind that the equal-weighted strategy results in only 1.81% and 1.71% exposure to each right now. 

4. Global X Robotics & Artificial Intelligence ETF (NASDAQ: BOTZ)

Investors looking for market-cap-weighted exposure to AI and robotics stocks may like BOTZ, which currently holds NVIDIA as its top holding with an 11.79% allocation as of June 1, 2023. This ETF tracks the proprietary Global Robotics & Artificial Intelligence Thematic Index, which currently sports 44 holdings from across the world. BOTZ charges a 0.69% expense ratio. 

While U.S. AI and robotics stocks have a 45% weighting in BOTZ, countries like Japan also see strong representation at 32.9%. A higher proportion of companies there use or develop industrial robotics and automation. This can be seen with BOTZ’s sector representation, where industrials clock in at 38% behind technology at 43.7%. 

5. Global X Artificial Intelligence & Technology ETF (NASDAQ: AIQ)

Looking to focus more on AI and less on robotics? A viable alternative to BOTZ is AIQ, which tracks the Indxx Artificial Intelligence & Big Data Index. This Index currently tracks 86 companies that stand to benefit from further development and utilization of AI in their products and services and those that manufacture hardware that empowers AI use. 

If U.S. large-cap tech exposure is your goal, AIQ might be the best ETF for that. NVIDIA is currently the largest holding at 5.3%, followed by Meta Platforms, Tesla Inc. (NASDAQ: TSLA), and Microsoft Corp. (NASDAQ: MSFT). In fact, 66.8% of this ETF is made up of U.S. stocks, and 62.5% of its holdings come from the tech sector. AIQ charges a 0.68% expense ratio.

How to Choose AI ETFs

Here are a few tips and tricks investors can employ to find the best AI ETFs for their needs.

• Examine the ETF’s index: How does it define AI stocks? Is it equally or market-cap weighted? Does it hold non-AI-related stocks from outside the tech sector?
• Examine the ETF’s holdings: Does the ETF only hold large-cap stocks, or does it also hold small and mid-cap stocks? Is it U.S. focused or globally diversified? What does the ETF’s sector representation look like?
• Examine the ETF’s fees: What expense ratio does the ETF charge? How does it compare to similar ETFs from other providers that focus on AI?
• Examine the ETF’s historical performance: How has the ETF performed over the trailing, three, five, and 10 years compared to a broad technology sector ETF or a broad-market ETF tracking an index like the S&P 500?

Benefits of Investing in AI ETFs

Investors who decide to buy an AI ETF can reap multiple potential benefits, which include:

• Diversification: By investing in an AI ETF, investors can gain access to a broad spectrum of AI companies, ranging from big tech giants to smaller, innovative firms. This choice reduces the potential negative impact that poor performance from a single stock pick might have on the investor’s portfolio.
• Potential for high returns: Companies at the forefront of AI development are well-positioned to capitalize on industry growth. Therefore, investing in AI ETFs offers the potential for higher returns versus the overall market as these technologies become more prevalent.
• Lowered entry barrier: For many investors, understanding the complex dynamics of AI and its applications can be daunting. An AI ETF simplifies this by offering a curated exposure to AI, allowing investors to leverage the expertise of fund managers who can better understand and navigate this specialized sector.

Considerations With AI ETFs

AI ETFs may not be a suitable investment for all investors. Before making an investment into an AI ETF, keep the following considerations in mind.

Higher Fees

ETFs that focus on specific sectors or niche themes, such as AI, can often come with higher management fees compared to broad market or index ETFs. The added expenses are usually a result of the increased research and management efforts required to effectively navigate these specialized areas of the market. Before investing, it’s crucial to understand the fee structure of an AI ETF and how it might impact overall returns.

Possible Underperformance

While the AI sector has immense potential, it’s still a relatively new space. Companies in this sector might struggle to generate profits in the short term as they continue to invest heavily in research and development. Additionally, there are regulatory uncertainties and changes in government policy could impact the industry. As a result, some AI ETFs may underperform broader market indices, particularly in the short term.

High Volatility

The value of AI companies can fluctuate widely based on new technological breakthroughs, product launches, regulatory changes and competitive dynamics. This can lead to high price volatility for AI ETFs. Investors should be prepared for potential short-term losses and should consider AI ETFs as a part of a diversified portfolio suitable for long-term investing. Remember, while the potential for high returns exists, it comes with a corresponding risk level.

Invest in AI ETFs with These Top Brokers

This ETF type is highly popular right now, so it’s important to do your research before committing your money to a specific one. Here is a list of brokers that support AI ETF trading and offer research tools to help investors select the right one.

Frequently Asked Questions

The post Best AI ETFs by Tony Dong appeared first on Benzinga. Visit Benzinga to get more great content like this.