GINN - BofA takes neutral view on AI ETFs weighing growth potential vs. near-term headwinds

2023-07-11 10:55:56 ET

Bank of America gave a bullish long-term outlook for exchange traded funds focused on the artificial intelligence sector, although the firm also noted near-term risks, such as broad market concerns tied to macro conditions and valuation worries. As a result, he firm issued a Neutral rating on AI ETFs.

On the bull side, BofA argued in a note to clients Tuesday that the AI segment offers the prospect of strong earnings. This potential upside in financial figures comes at a time in when economic conditions put profits at risk in other segments.

“AI is one of the areas in the market where investors are anticipating earnings to rise, even in the event of a global slowdown,” BofA stated. The firm noted that artificial intelligence has 9% earnings growth potential where earnings expansion is otherwise scarce.

Along with earnings projections, BofA pointed to diversification and increasing demand for AI as other tailwinds for the sector.

"Beyond returns, we see 3 more benefits to AI ETFs: 1) AI ETFs offer more diversification than “vanilla” growth and tech funds; 2) AI has strong 9% earnings growth potential where earnings are otherwise scarce (SPY -3%); and 3) governments and companies have entered the AI arms race with no end to spending in sight, the US having spent $249bn already," the firm stated.

On the bearish side, BofA pointed to valuation as a possible headwind, noting that "late comers are paying up" to jump into the space. Meanwhile, volatility in the sector creates a potential "flight risk," the firm argued, along with the downside potential from "macro sensitivity."

At the same time, BofA warned investors about potential "AI-washing" within funds, advising that investors understand the composition of a particular ETF before buying it.

"Unlike sector and industry ETFs that are clearly defined by standardized classification systems, AI ETFs are thematic and index providers have much more discretion in company selection criteria," the firm stated.

BofA’s global research team initiated coverage on eight artificial intelligence and robotics ETFs with a Neutral view. See below the eight ETFs along with their 2023 performance that BofA highlighted.

• GX Artificial Intelligence & Tech ETF ( NASDAQ: AIQ ) +37.5% .
• GX Robotics & Artificial Intelligence ETF ( NASDAQ: BOTZ ) +39.2% .
• ALPS Disruptive Technologies ETF ( DTEC ) +17.2% .
• Goldman Sachs Innovate Equity ETF ( GINN ) +19.2% .
• iShares Robotics and Artificial Intelligence Multisector ETF ( NYSEARCA: IRBO ) +28.4% .
• Artificial Intelligence and Robotics ETF ( NASDAQ: ROBT ) +27.2% .
• iShares U.S. Tech Breakthrough Multisector ETF ( TECB ) +36.5% .
• iShares Exponential Technologies ETF ( XT ) +17.7% .

“There are reasons to consider investing now," BofA said of the sector. "Momentum is strong: the average AI ETF has gained 27% this year vs. an S&P 500 ex-tech that is unchanged. AI stocks can also diversify portfolios, with lower correlations than other growth indexes and greater global & sector exposure.”

More on Artificial Intelligence:

• Barclays spotlights 'immense' potential for AI, points to NVDA, MSFT as 'key names'
• BOTZ, Nvidia: Are AI Stocks A Good Long-Term Investment?
• BOTZ And UBOT: Opportunistic Investments In AI Trend (Technical Analysis)

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