By Anna Churakova
By Constantine Belov

Exploring the Potential of AI ETFs - Top 3 Picks for 2023

Exploring the Potential of AI ETFs

Artificial intelligence (AI) has practically become part of everyday life, simplifying and optimising many operations and industries. Consequently, businesses centred around AI are now magnets for investors keen on capitalising on the rapid advancements within these enterprises.

With this development, a new and cutting-edge vehicle has appeared - AI Exchange-Traded Funds (ETFs). They were invented to strengthen the power of AI, offering investors admission to a diverse range of AI-related equities and tech developments.

This article will discuss AI Exchange-traded funds, explain why they are worth considering, and, most importantly, it will review the top 3 AI ETFs to watch and potentially add to your portfolio in 2023.

Key Takeaways

  1. With AI ETF, stockholders can diversify a range of AI-related stocks and technologies.

  2. AI exchange-traded fund is structured like traditional ETFs but focuses on companies working on advancing and applying artificial intelligence technology.

  3. Reasons to invest in AI exchange-traded funds include exposure to AI industry growth, actively managed funds by experts and potential outperformance of the broader financial market.

What is ETF?

What is ETF

An Exchange-Traded Fund is a form of fund and exchange-traded product with tradeable shares on a stock exchange. Exchange-traded funds are created to chase the performance of a specific index, commodity, bond, or basket of assets, similar to mutual funds. However, unlike joint funds, exchange-traded fund shares are purchased and sold like individuals on stock exchanges, providing investors with liquidity and flexibility. Exchange-traded funds have evolved in demand among stockholders for their low expense ratios and competence to offer direction to various asset categories.

Fast Fact

The very first ETF in the world was Standard & Poor’s Depositary Receipt, better known as SPDR (“spider”), introduced by State Global Advisors and traded under the symbol SPY in 1993. 

What is an Artificial Intelligence Exchange-Traded Fund?

AI-powered ETFs are a relatively new breed of exchange-traded products that focus on organisations working on progressing and applying artificial intelligence. They are designed to equip stockholders with a convenient and diversified way to gain admission to the rapidly growing market.

They are structured like traditional exchange-traded funds, trading on exchange platforms like individual stocks. However, what sets them apart is their investment tactics and budget. Instead of tracking a special market index or sector, artificial intelligence exchange-traded funds are built around a selection of automation companies that are leaders or innovators in the AI space.

What is an Artificial Intelligence Exchange-Traded Fund?

These exchange-traded funds use sophisticated algorithms and data analysis tactics to spot and invest in corporations at the front line of AI examination and evolution. Selecting often involves considering factors such as a company's revenue from AI-related products or services, investments in AI study, and prospects for future development in the AI industry.

Reasons to Invest in Artificial Intelligence ETF

Allocating capital in artificial intelligence ETFs offers several compelling advantages:

It helps to diversify the Portfolio: AI ETFs typically pool together various companies specialising in artificial intelligence, machine learning, and data analytics. This means that instead of putting all your eggs in one basket by investing in a single AI company, you spread your investment across multiple competitive players in the sector. As a result, if one company underperforms, the negative impact on your overall portfolio is minimised. 

Enables Expansion: Investing in an AI ETF provides exposure to multiple sectors that are integrating AI solutions, such as healthcare diagnostics, autonomous vehicles, and financial algorithms. This multi-sectoral approach diversifies risk and allows investors to benefit from the widespread adoption and growth of AI technologies. Therefore, investing in AI ETFs could be a strategic move for those looking to broaden their portfolio and capitalise on the transformative impact of artificial intelligence across industries. 

Offers Expert Management: The AI exchange-traded fund has a professional fund manager who uses big data index and driven strategies to determine the most promising AI firms, potentially beating the broader market.

The Best AI ETFs to Invest in 2023

The Best AI ETFs to Invest in 2023

Now let’s look at the most promising investing assets which potentially stand at the top of the artificial intelligence ETF list.

The Global X Robotics & Artificial Intelligence ETF (BOTZ)

The Global X Robotics & Artificial Intelligence and Technology ETF equip investors with concentrated exposure to companies in the artificial intelligence sector. This fund tracks the Indxx Global Robotics & INdxx Artificial Intelligence Thematic Index, including holdings like Nvidia Corp, Intuitive Surgical, iRobot, and other AI companies working on automation software, technology, and machine learning (ML).

BOTZ has demonstrated solid performance, driven by the evolution of artificial intelligence technologies. Its unique appeal lies in focused sector exposure and long-term expansion prospects. BOTZ has a sizeable allocation to Japanese and Swiss equities at 28.7% and 10.1%, respectively. Global X Robotics & Artificial Intelligence offers a varied and thematic-oriented approach for investors aiming to capitalise on the promising AI sectors.

BOTZ charges a 0.69% cost ratio.

The Robo Global Robotics and Automation Index ETF (ROBO)

The ROBO global robotics and automation index ETF (ROBO) has demonstrated impressive long-term growth since its inception in 2013, driven by the increasing adoption of industrialisation technologies and ML. While ROBO global robotics and automation ETF diversifies across various sectors, it can be subject to volatility, influenced by the stock market, sentiment and economic conditions.

The ETF's growth prospect is tied to the continued development of automation and artificial intelligence technology applications across medical, manufacturing and logistics industries. Notable holdings within ROBO global robotics and automation ETF's portfolio are companies developing the technology and infrastructure enabling AI. According to the latest data, iRobot, Keyence, Daifuku, Teradyne, and FANUC are among them.

ROBO trails the broad-market and robotics index with dividends factored into the return.

ROBO's dividend yield is 1.42%, and its cost ratio is 0.95%. 

The iShares Robotics and Artificial Intelligence ETF (IRBO)

The iShares Robotics and Artificial Intelligence Multisector ETF is an exchange-traded fund actively managed by BlackRock's iShares division, focusing on tracking the performance of international companies operating in the artificial intelligence and robotics sector.

IRBO aims to equip investors with diversified exposure to this burgeoning industry, seeking to mirror the returns of a specific data index here. IRBO follows a passive investment approach and typically includes firms from various regions, offering an international perspective on the industrial robotics and AI market. It also tracks the NYSE FactSet Global Robotics and Artificial Intelligence Index. IRBO comes with an expense ratio, which covers the fund's operational costs, and its shares are traded on stock exchanges, providing liquidity for stockholders.

While IRBO doesn't employ unique strategies or criteria, it plays a pivotal role in allowing stockholders to participate in developing AI technologies and industrial robots.

IRBO's expense ratio is competitive at 0.47%.

Factors to Consider When Choosing an Artificial Intelligence ETF

When selecting an ETF, it's crucial to evaluate several key factors and mitigate risk to make a well-informed decision:

Factors to Consider When Choosing an Artificial Intelligence ETF

Underlying Holdings - Examine the ETF's portfolio to ensure it includes businesses and companies engaged in AI study, development, or utilisation. Look for well-established tech giants and innovative startups.

Expense Ratio - Consider the fund's expense ratio, as lower fees can significantly impact your long-term returns. 

Liquidity - Check the ETF's trading assets and bid-ask spread to ensure easy selling and buying without significant price discrepancies.

Team and Performance History - Research the ETF issuer's reputation and professionalism in AI investments. Analyse the ETF's historical returns and risk metrics to gauge its track record.

Dividends and Tax Efficiency - Determine if the distributed dividends or generated earnings align with your investment goals. Understand the tax implications of the ETF, such as capital gains distributions.

Regulatory Considerations and Long-term Prospects - Be aware of any ethical concerns or regulatory challenges associated with AI companies in the ETF.  

Evaluate the growth prospect of AI technology and whether the ETF aligns with your long-term goals. Consider your acquisition horizon, as artificial intelligence ETFs may have different risk profiles and returns over time. Don’t forget to monitor broader market circumstances and economic factors affecting industries connected to artificial intelligence.

Risks Associated with AI Exchange-Traded Funds

In the AI market, past performance doesn't promise future results, so even ETFs with strong performance carry essential risks. For example, Sentient Technologies, a very promising startup hedge fund that offered revolutionary algorithms-based trading strategies, managed to attract $143 million in risky capital funding and returned only 4% in 2017 and 0% in 2018, followed by its liquidation.

The composition of the ETF's holdings can change over time, so stockholders should deliberate their goals and risk readiness, staying informed about the AI exchange-traded fund's latest holdings and general situation before making the decision.

Final Takeaway

In finance, AI exchange-traded funds represent a compelling opportunity for companies to explore the potential of AI. This innovative investment strategy provides diversification and exposure to the AI sector and AI technology itself.

However, it's essential to approach exchange-traded funds cautiously, as they come with risks, and performance doesn't guarantee future results.

Stockholders should track changing exchange-traded funds compositions and market dynamics to make well-informed decisions and pick really actively managed ETFs.

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