Summary
- Investors' interest in AI stocks is rising and there will be many winners and losers once this cycle of excitement is over.
- Going with a thematic ETF versus trying to pick individual winners is generally a safer bet when dealing with trendy investments like AI.
- History is replete with examples of trendy investments that have turned into expensive mistakes, with recent examples being electric vehicles, cloud computing, SaaS companies, crypto and NFTs.
- ROBT is an ETF that offers exposure to AI, robotics and automation is already delivering more than double the S&P 500's return YTD.
- It has lower expenses than larger peers ROBO and BOTZ and is the most diversified of the three, offering downside protection which is key with trendy investments.
As far as investing in tech stocks is concerned, Artificial Intelligence ((AI)) is arguably the hottest buzzword and one of the key catalysts to watch in 2023 following the phenomenal success of ChatGPT, the AI driven search tool developed by OpenAI.
ChatGPT has taken the internet by storm despite being only a few months old. One recent report states that it topped 10 million daily active users within 40 days of launch, outstripping Meta ( META ) owned Instagram's initial rapid growth.
ChatGPT has also caught the attention of Wall Street following Microsoft's ( MSFT ) recent move to invest $10 billion in OpenAI. MSFT in 2019 made its maiden $1 billion investment in OpenAI so this new $10 billion investment, which is a 10x increase in terms of ticket size, is seen as a compelling sign of the heightened expectations that MSFT has of the AI space.
MSFT's big bet on AI appears to have emboldened investors who are interested in profiting from this trend, with MSFT CEO Satya Nadella noting at the recent World Economic Forum that the "golden age" of AI is here.
The growing excitement around AI has spurred a flurry of new investments and products in the space. Dozens of ChatGPT-like apps are coming to market every day promising to transform productivity and targeting a wide range of users, including consumers, enterprises and government agencies.
Investors are bidding up the stocks of AI related companies on the slightest positive news, with a recent example being C3.ai ( AI ) jumping more than 20% in early trading on Tuesday after it announced it was launching a new product suite that would integrate with ChatGPT. C3.ai is an enterprise artificial intelligence software company.
While the investment opportunities in AI abound, the risks emanating from its potential to turn into a fad cannot be ignored. Fads can be hazardous for investors, even though the underlying technology driving the fad is beneficial and transformational in the long run.
History is replete with examples of trendy investments that have turned into expensive mistakes, with recent examples being electric vehicles, cloud computing, SaaS companies, crypto and NFTs.
Manage the downside risk with an ETF
Going with an ETF versus trying to pick individual winners is generally a safer bet when dealing with trendy investments like AI. First Trust Nasdaq Artificial Intelligence and Robotics ETF ( ROBT ) offers investors a smart way to capitalize on the positive investor sentiment towards AI related stocks.
With $193 million in Assets Under Management ((AUM)), ROBT tracks a modified equal-weighted index of all-cap, global companies involved in artificial intelligence or robotics. The index is rebalanced quarterly and reconstituted semi-annually and as at Jan 30 the ETF had 119 holdings.
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ROBT was launched in 2018 and therefore has a relatively short trading history. However, it has established an early lead over the S&P 500 in 2023. It is now up 13.41% YTD vs the S&P 500's 5.89% gain over this time.
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I believe it could extend this lead as investor interest in AI intensifies in coming months. Importantly, I believe it offers significant safety due to diversification. Some investors who can pick the right AI stocks are likely to get higher returns than those who choose ROBT. However, those who pick the wrong AI stocks will suffer far greater losses than ROBT holders once the excitement in AI subsides. Downside protection is an important factor to consider when investing in trendy technologies.
Most affordable and diversified
Another reason why ROBT is appealing is that it has the lowest expenses despite having low Assets Under Management ($193 million) compared with peers Global X Robotics & Artificial Intelligence ETF ( BOTZ ), which has $1.50 billion in AUM, and ROBO Global Robotics and Automation Index ETF ( ROBO ), which has $1.3 billion in AUM. ROBT has an expense ratio of 0.65% vs BOTZ's 0.68% and ROBO's 0.95%.
The performance of these ETFs has been uniform YTD as the chart below illustrates.
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All of the three are good investments amid the increased investor interest in AI but going with ROBT which has the lowest expenses could help maximize returns, particularly if you are investing at scale.
ROBT is also the most diversified by number of holdings. It has 119 stocks vs ROBO's 91 and BOTZ's 49. Diversification helps reduce downside risks. ROBT an ETF worth buying to gain exposure to the AI trend while hedging against the risk of choosing speculative individual stocks.
For further details see:
ROBT: Managing The Downside Risk In AI Related Stocks