Picking the Best AI ETFs

AI ETFs are exchange-traded funds that invest in stocks of companies operating in the business of artificial intelligence, such as robotics, navigational systems, automated machines, vehicles, and machine learning used for big data-focused processes in all industries. AI ETFs may concentrate all of their holdings on AI stocks or include other technology-related stocks. Find out if AI ETFs are right for you.

Outlook for Artificial Intelligence and AI ETFs

The world of artificial intelligence (AI) is still in its infancy but shows great promise for the future, which makes AI a compelling investment idea. The beginnings of AI can be seen in today's technology with interactive, voice-powered personal assistants like Siri and Alexa, automated cars, and suggested search ideas in search engines like Google.

But the artificial intelligence of the future will be devices that can learn, attach meanings to new experiences, and get smarter and more aware, much like humans do. This will likely be the next phase of the digital age. The computers of tomorrow will be able to solve problems or find cures for diseases, making today's technology obsolete and opening doors for more growth in the AI sub-sector of technology.

How to Invest in Artificial Intelligence

Arguably, the best way to invest in AI technology is to invest in AI ETFs. This is because, as with other concentrated sectors that are still in the infancy stage of the business cycle, it is inherently difficult and risky to attempt to pick individual companies that will lead the industry.

When you invest in an AI ETF, you'll typically get exposure to dozens of stocks, which will reduce overall market risk by placing bets on more than just one stock. This is especially important since the industry is new and the best in breed players inside it are not identified yet.

Picking the Best AI ETFs

Identifying the best AI ETFs on the investor level is a subjective exercise. For example, some investors may want a fund that focuses primarily on AI stocks, while others may want a tech stock fund that only allocates a portion of the fund's assets to AI stocks. There are also funds that use artificial intelligence to choose the holdings.

Here is a summary of the basic types of artificial intelligence ETFs:

• Focused AI ETFs: These are ETFs that invest specifically in companies involved in products or services related to artificial intelligence. These funds typically have 100 percent exposure to AI stocks.
• Limited Exposure AI ETFs: These funds have at least 25% of portfolio exposure to companies that use AI technology. Examples of such companies are Amazon (AMZN), Tesla Motors (TSLA), Apple (AAPL), and Alphabet (GOOG, GOOGL).
• AI-Managed Funds: These funds may not invest in AI stocks but the fund itself utilizes AI technology to select the individual securities to be held in the fund.

In no particular order, here are some of the best AI ETFs to buy now:

• Global X Robotics & Artificial Intelligence Thematic (BOTZ): One of the larger AI ETFs, BOTZ has over $1.40 billion in assets under management. According to Global X, the fund seeks to invest in companies that potentially stand to benefit from increased adoption and utilization of robotics and artificial intelligence (AI), including those involved with industrial robotics and automation, non-industrial robots, and autonomous vehicles. Expenses for the fund are 0.68%, or $68 per $10,000 invested.
• Robo Global Robotics & Automation Index (ROBO): The first robotics and automation ETF to come to market, ROBO concentrates holdings on companies that work in industries related to robotics, automation, and artificial intelligence all around the world. ROBO holds over 80 stocks, diversified across small-, mid-and large-cap stocks. ROBO has $1.19 billion in assets under management, and the expense ratio for ROBO is 0.95 percent.
• EquBot AI Powered EQ International ETF (AIIQ): This ETF does not seek to purchase stocks of companies in the AI industry but rather uses the power of artificial intelligence to pick stocks to be held in the fund. The underlying fund investments in AIIQ are based on the results of proprietary quantitative models developed by Equbot with IBM Watson artificial intelligence. The actively-managed, AI-driven methods will create a portfolio of between 80 and 250 stocks, choosing from more than 15,000 companies across the globe, as it sifts through information, learning from its processes. Assets under management for AIIQ are relatively small at $3.66 million, and the expense ratio is 0.79 percent.

Bottom Line

The bottom line on AI funds is that there is potential for increased demand for robotics, automation, and artificial intelligence in the future. Therefore, the growth potential for AI stocks and AI ETFs is significant, although market risk is generally higher than more diversified investments. Investors should use caution in adding narrowly focused sector funds, such as AI ETFs, to a portfolio.

Frequently Asked Questions (FAQs)

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.