Artificial intelligence (AI) is the latest blockbuster technology capturing investors' attention. Depending on which Wall Street forecast you rely upon, AI has the potential to add between $7 trillion and $200 trillion to the global economy over the next decade, so the opportunity is impossible to ignore.
However, as is the case with any new technology, that value won't be distributed equally. There will be winners and losers. So far in 2023, the biggest AI winners have been Nvidia and Microsoft because both companies are enjoying an all-time-high stock price.
But while many smaller AI stocks have also experienced solid gains this year, they remain significantly below their best-ever levels:
- CrowdStrike is up 100% in 2023 but down 27% from its all-time high.
- C3.ai is up 160% in 2023 but down 81% from its all-time high.
- SoundHound AI is up 19% in 2023 but down 83% from its all-time high.
It highlights the difficulty of picking long-term winners and losers despite overwhelming enthusiasm for AI among investors. Nobody really knows exactly how the AI revolution is going to play out, nor which stocks will deliver the best returns in the coming years. But there's a great way to invest without needing that information at all.
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Exchange-traded funds are a great option for investors
Exchange-traded funds (ETFs) typically hold dozens or even hundreds of individual stocks from a specific sector of the market, neatly packaged into one security. Therefore, instead of investors trying to pick individual winners in the AI industry, they can buy one or two AI ETFs and gain very diverse exposure to the industry.
That diversification means an ETF is immune to the failure of one particular company because no single holding makes up a dominant portion of its portfolio. In a new industry like AI, there will almost certainly be failures along the way, so buying an ETF is a great way to manage that risk.
Many AI-focused ETFs have come to market over the last few years, and I'll share two that investors might want to consider buying.
1. First Trust Nasdaq Artificial Intelligence & Robotics ETF
The First Trust Nasdaq Artificial Intelligence & Robotics ETF (ROBT 1.54%) is one of the more diversified funds focused on the AI industry. It holds shares in 109 companies, which are split into three categories:
- Enablers: These companies produce the hardware needed to develop, train, and deploy AI models. Semiconductor giants like Nvidia and Advanced Micro Devices fall into this category.
- Engagers: These companies develop AI applications on top of that hardware. Microsoft and Amazon are good examples.
- Enhancers: Any company using AI to improve its customer experience is an enhancer, even if the technology isn't a core part of its revenue. Meta Platforms falls into this category because it uses AI to recommend content to users of its social networks, Facebook and Instagram.
The ROBT ETF holds 109 stocks, with its No. 1 holding is AeroVironment making up 2.3% of the portfolio. Investors will also find UiPath in ROBT's top 10; it develops robotics automation software. That stock is one of Cathie Wood's favorite AI plays. The ETF owns many popular AI stocks, like Nvidia, Microsoft, Amazon, C3.ai, and Advanced Micro Devices, although none of those are in its top 10.
The absence of some of the most popular AI stocks in ROBT's top 10 holdings means it has a slightly more conservative risk profile than other ETFs. It won't be as exposed if high-flying names like Nvidia cool off, but on the other hand, that means it has only delivered a return of 15% this year, which is less than the 18% gain of the S&P 500 index.
Over the long term, the ROBT ETF might be ideal for investors who want exposure to the exciting new AI industry with a minimal amount of risk.
2. Global X Autonomous & Electric Vehicles ETF
Investors with an appetite for a little more volatility might like the Global X Autonomous & Electric Vehicles ETF (DRIV 1.75%). It offers exposure to 76 stocks, including some of the most popular electric vehicle manufacturers and those developing autonomous technologies (a fast-growing application for AI).
The top 10 holdings in this ETF account for 31.9% of the total value of its portfolio. But unlike the ROBT ETF, the top 10 in this fund is packed with some of the most popular names in AI.
Its largest position is in Google parent Alphabet, which accounts for 3.84% of the fund. Not only is that company a dominant force in the AI industry, but it also owns Waymo, a leading self-driving vehicle company. Stocks like Nvidia, Apple, Tesla, and Microsoft also feature in the DRIV ETF's top 10 holdings.
The fund has only delivered a return of 17% this year. That's because it owns several stocks that are trading deep in the red for 2023, including Ford and General Motors, which are recovering from a recent workforce strike. It also owns Nikola and Plug Power, both of which have lost more than half their value this year.
Nonetheless, the autonomous driving and electric vehicle industries are still at a very early stage, so there is a substantial amount of value yet to be unlocked. Tesla plans to roll out self-driving robotaxis in the future, which could transform the company's economics, and that will create a windfall for the DRIV ETF.
In the long term, this fund represents a great way to invest in the financial success of a true use-case for AI.
