Artificial intelligence (AI) exchange traded funds (ETFs) have struggled to keep pace with the big AI stock of 2023 – Santa Clara-based microchip designer Nvidia (NVDA:NASDAQ).

Nvidia’s shares have risen 245% year-to-date (valuing the chipmaker at $1.22 trillion) in contrast the main AI ETFs: L&G Artificial Intelligence (AIAG) has returned 34.7% and WisdomTree Artificial Intelligence (INTEL) has returned 28.6% over the past year.

Over three years the WisdomTree Artificial Intelligence UCITS ETF has delivered a return of 8.2% and the L&G Artificial Intelligence UCITS ETF has returned 7.4%.

LOOKING AT AI ETF PERFORMANCE

That doesn’t mean these products are not fit for purpose but it underlines the value of understanding what underlying investments they hold.

Chris Ganatti, global head of research at WisdomTree tells Shares AI ETFs have surrendered some of their popularity with investors in the latter part of this year: ‘Investing in AI ETFs has been more popular in the first half of than the second half of 2023.

‘Even though the AI story is [ever present] US investors have been reluctant to invest due to uncertainty surrounding what direction the US central bank, the Federal Reserve is going to take with interest rates. There is also the issue of US inflation. This has perhaps dampened investor enthusiasm a little bit towards investing in AI ETFs.’

AI ETFs provide exposure to a large basket of AI stocks – so an investor can have diversified exposure to the AI theme. The additional bit of good news is the costs associated with AI ETFs are relatively low: 0.49% per annum for the L&G Artificial Intelligence UCITS ETF and 0.4% for the Artificial Intelligence UCITS ETF.

WHAT DO AI ETFs INVEST IN?

There are some similarities in what AI ETFs invest in, for example most of them hold Nvidia as you would expect but holdings are fully diversified across various themes like automation, robotics, deep learning and computer vision.

L&G Artificial Intelligence UCITS ETF, for example, has 62 holdings which, apart from Nvidia, include US software and data science firm Alteryx (AYZ:NYSE), San Francisco-based machine data firm Splunk (SPLK:NASDAQ) and US cybersecurity company Crowdstrike (CRWD:NASDAQ).

Interestingly WisdomTree does have Nvidia in its portfolio but it is not one of the top holdings – likely explaining its slightly weaker showing over the last year relative to the L&G product. It tracks an index created in partnership with Nasdaq which includes the following:

Enhancers: Companies who are a prominent force within AI, but whose relevant product or service within AI is not currently a core part of their revenue;

Enablers: Companies who are key players in the AI space, with some of their core products and services enabling the continued development  of AI;

Engagers: Companies whose main focus is in providing AI-powered products and services.

Within each group, an AI intensity score is assigned to each company based on factors including: the estimated portion of a company’s revenues which are attributable to AI products and services; how core AI is to the company’s product offering and positioning; the market prominence of a company’s AI solution.

Then, the companies with the top AI Intensity Score in each group are selected for inclusion. The groups’ total weight is set to 10% for Enhancers, 40% for Enablers and 50% for Engagers. Finally, individual companies within each group are equally weighted.

Global X Robotics & Artificial Intelligence ETF (BOTZ), as the name suggests, invests in companies with a robotics focus alongside AI stocks.

Tejas Dessai, research analyst at Global X says: ‘An AI ETF can hold a mix of ‘Big Tech’ companies (who have the budgets to innovate), chipmakers, semiconductors, data storage providers, robotics, and automation companies.’

The global robotics market is set to nearly double to $96 billion by 2026 from $55 billion in 2021, according to GlobalX, and is a ‘growth area’, according to this provider.

Global X’s Robotics & Artificial Intelligence vehicle holds 38 companies ranging from Nvidia (its largest holding at 14.12%) to Intuitive Surgical (ISRG:NASDAQ) (9.98%), a robotics assisted surgery pioneer and maker of the da Vinci surgical systems and ABB (ABBN:SWX) a Swedish-Swiss multinational robotics and machine automation supplier (8.28%).

IS THE THEME OVERPLAYED?

Global X’s Dessai does not think investors have missed the boat on AI, he tells Shares: ‘We think there are opportunities still ahead of us in the AI sector. We are now in the first phase of the AI revolution.’

While Nvidia has been the clear AI winner on the stock market this year, it could be difficult to call exactly which companies will benefit most from this theme in the medium term and this is the argument for using an ETF to gain diversified exposure. Just make sure you do your homework.

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