What is AI ETF?
An AI ETF is an exchange-traded fund that invests in stocks of organizations in the AI business, such as automated vehicles and machines, navigational systems, and robotics. Artificial intelligence ETFs may focus all their holdings on artificial intelligence stocks, or they may comprise other technology-based stocks.
How to Invest in Artificial Intelligence
Indubitably, the number one way to invest in artificial intelligence technology is by investing in AI ETFs. The reason behind this is that, just like other concentrated fields that are still in the earliest stage of the enterprise cycle, it is naturally risky and difficult to try to pick individual organizations that will dominate the sector.
When an individual makes an investment in an AI ETF, they will usually obtain exposure to a plethora of stocks, thereby reducing the general market risk by putting bets on more than a single stock.
What are the Basic Types of Artificial Intelligence ETFs?
It is quite a subjective task to identify the top AI ETFs on the investor tier. For instance, certain investors may seek a fund that is primarily focused on artificial intelligence stocks, while some others may prefer a tech stock fund that only distributes a part of the fund’s asset to artificial intelligence stocks. We also have funds that utilize AI to select the holdings.
Below we have provided explanations on the basic types of AI ETFs:
Focused AI ETFs
This type of ai ETF specifically invests in businesses that have products or services related to AI. These funds usually have 100% exposure to artificial intelligence stocks.
Limited Exposure AI ETFs
These kinds of funds have portfolio exposure of at least 25% percent to organizations that utilize artificial intelligence technology. Examples of these companies include Alphabet (GOOG, GOOGL), Tesla Motors (TSLA), and Amazon (AMZN).
Funds like this may be invested in artificial intelligence stocks, however, the fund itself makes use of artificial intelligence technology to pick the individual securities that will be held in the fund.
( Also Read: What is Artificial Intelligence? )
Why Should I Invest in AI ETFs?
Passively managed ETFs tend to have a much-reduced expense ratio when compared to actively managed funds, which mutual funds typically seem to be. Unlike open-end mutual funds, ETF costs of operations can be streamlined. All managed funds incur costs of operation regardless of the structure.
Some of such costs are marketing expenses, administrative expenses, distribution costs, custody costs, and portfolio management fees. Costs have always been very crucial in predicting returns. In all, a fund that incurs a lower investment cost will guarantee a higher return on that fund.
An AI ETF has a higher tax advantage than mutual funds. As passively-managed investments, ETFs (as well as index funds) typically record lesser capital gains than mutual funds, which are actively managed.
Risk management and portfolio diversification
Investment companies may want to quickly obtain portfolio exposure to certain industries, styles, sectors, or regions but lack expertise in such areas. Considering the vast variety of industry, style, country, and sector categories available, ETF shares have the ability to offer easy exposure to an investor in a particular desired market area.
In addition, ETFs are currently traded on almost every major currency, commodity, and asset class in the world.
In a case where an investor has big risk in a certain sector but is unable to diversify that risk due to taxes or restrictions, the individual can decide to short an industry-sector ETF in this situation or proceed to purchase an ETF that shorts a sector on their behalf.
Immediate Sector Reinvestment
In an open-ended ETF, the dividends of the organizations are immediately reinvested, while the precise timing for reinvestment can vary for index mutual funds.
A couple of other advantages include it is also available in alternative investments, it upholds transparency, and it boosts time efficiency.
The Best AI ETFs to Buy Now
Global X Robotics & Artificial Intelligence Thematic (BOTZ):
BOTZ, which is one of the biggest AI ETFs, has more than $1.40 billion in assets under management. As reported by Global X, the goal of this fund is to invest in organizations that have the potential to leverage the adoption and utilization of artificial intelligence (AI) and robotics, including the ones that are involved with autonomous vehicles, non-industrial robots, and industrial automation and robotics. The fund has an expense ratio of 0.68% or $68 for every $10,000 invested.
Robo Global Robotics & Automation Index (ROBO):
ROBO was the first automation and robotics ETF to be introduced to the market. It centers its holdings on organizations that operate in industries associated with artificial intelligence, automation, and robotics all over the world. ROBO has more than 80 stocks, which are diversified across large-, mid, and small-cap stocks. It holds $1.19 billion in assets under management and the expenses for ROBO is 0.95%.
EquBot AI-Powered EQ International ETF (AIIQ):
This ETF does not concern itself with buying stocks of businesses in the artificial intelligence sector but instead, it utilizes the power of AI to select stocks that will be held in the fund. The primary fund investments in AIIQ are determined by the outcomes of proprietary quantitative models developed by Equbot with IBM Watson AI.
The fully-managed, AI-based methods will build a portfolio of about 80 and 250 stocks, selecting from over 15,000 organizations across the world, as it carefully filters information, and learning from the procedures. AIIQ has a relatively small amount of assets under management at $3.66 million and an expense ratio of 0.79%.
Conclusively on AI funds, it is pertinent to state that there’s the potential for increasing demands in AI, automation, and robotics in the future. Thus, the growth potential for AI ETFs and AI stocks is significant, even though the market risk is typically greater than more diversified investments. Investors should be cautious in adding sector funds that have narrow scopes, like AI ETFs, to a portfolio.
Also, it is necessary to understand that while AI may show impressive promise for innovative developments, the ETFs investment, as well as this sector of the market, are relatively new. Investments that show no long performance history, as in 10 years and above, may have higher market risk compared to investments that have proven track records.