Depending on your viewpoint, artificial intelligence (AI) can be anything from the frightening rise of the machines to the next great advance for humanity. Right now it seems like the business world is doing its best to benefit from the technology, which has investors clamoring to get onboard as well. Wall Street has taken notice and introduced products to help small investors do just that. But are AI exchange-traded funds (ETFs) really a good idea?
Nothing new here
The mass availability of artificial intelligence is new and exciting. But as far as technology trends go, the world has lived through many waves of new technology. For example, when combustion engine automobiles became widely available, household-name companies like Ford and General Motors were created. Moving to more modern times, personal computers created giants like Microsoft, Apple, and Intel. There is a lot of money to be made by investing in the companies that create, support, and distribute new technology.
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But the five stocks above are memorable only because they are the companies that survived. Basically, they were the winners. What investors forget is that in the early days of almost any new technology there is a gold rush as a multitude of companies vie for dominance. For example, the iconic brands General Motors owns were cobbled together from a wide collection of competitors to create a bigger entity. There were plenty of auto companies that simply closed up shop never to be heard of again. Neither of those two facts is unique when it comes to technology advances as new industries mature.
Indeed, the same is true of computers. Does anyone remember Tandy? Probably not -- it couldn't compete successfully with the industry's now dominant names. This dynamic unfolds time and time again, from trains to biotech. In the early days it is hard to know what companies will end up the long-term winners. But that has never stopped investors from trying.
The ETF option
Instead of picking just one or two companies, another option is to take something of a shotgun approach and buy a diversified list of companies. That's where exchange-traded funds come into play. An ETF sounds like a great choice -- with one investment you basically buy a portfolio of companies that could benefit from AI without the need to do any of your own homework on the companies in the ETF.
Two options include Global X Artificial Intelligence & Technology ETF (AIQ 1.43%) and Global X Robotics & Artificial Intelligence ETF (BOTZ 2.52%). These two ETFs are from the same ETF sponsor, and both prominently include the words "artificial intelligence" in their names. But step back and look at the other words in the ETF names: technology and robotics. Neither of these two ETFs are strictly focused on AI per se -- their mandates are broader. So is AI more of a selling point, or is there really enough of a focus to make owning either of these ETFs worth owning for AI exposure? That's something for each investor to decide on their own, of course, but it wouldn't be a stretch to wonder if Global X is simply trying to gather assets by jumping on a big investment trend.
These are clearly not the only ETF options, but they highlight the key issue. Are Wall Street firms simply creating products so they can gather more investor assets, and thus increase the fees they generate? For example, iShares Robotics and Artificial Intelligence Multisector ETF (IRBO 1.98%) seems like it is going down the same path. This particular ETF includes Netflix and FuboTV in its top 10 list. While AI might be a part of these companies' businesses, is it really enough to justify putting either of these streaming video companies in an AI ETF?
That brings up the big question investors need to ask: What am I paying? iShares Robotics and Artificial Intelligence Multisector ETF has an expense ratio of 0.47%. The two Global X ETFs have management fees just a touch under 0.7%. Compared to actively managed funds, those fees are modest. But the Technology Select Sector SPDR Fund (XLK 1.13%) has an expense ratio of just 0.1%, and when you examine the holdings and mandates of the AI ETFs -- well, they look like they are a bit more broadly diversified than you might hope. Paying much less to own a widely diversified technology ETF might actually lead to better long-term results. The chart above looks like early evidence of that.
Step back from the hype
There are good reasons to be excited about the prospects of AI. However, it is still early days, and the long-term winners are far from certain at this point. That makes investing in the space pretty risky, particularly given investor enthusiasm over the opportunity. While buying an ETF "focused" on the AI niche might sound attractive, investors need to make sure they understand what they are buying -- and, equally important, what they are paying. Wall Street has a bad habit of creating products to satisfy investor demand with the end goal of charging more fees without actually providing much additional benefit. The trends with AI ETFs probably won't be any different. Take your time and invest carefully.
