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Financial-data company FactSet ran an analysis of S&P 500 earnings calls over the last couple of months and found that 199 out of 500 companies mentioned AI or artificial intelligence on the call. That was an all-time record, breaking the mark of 182 mentions in the second quarter of 2023.
This finding also represents further proof that AI is increasingly becoming a key driver of success, not just for technology or AI Stocks but for those across the broad spectrum of sectors. In short, AI is a revolution in computing that will impact all companies to some degree or another.
As an investor, AI represents a huge opportunity and a challenge because it is becoming harder and harder to decipher what exactly is an AI stock. As such, it can be even harder to pick the winners.
However, there is one really good option for investors who aren't experts in AI to tap into the best companies at any given time: an AI-focused exchange-traded fund (ETF).
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The benefits of AI ETF
Three Top AI ETF
Balancing risk with a key benefit of AI ETF
The benefits of AI ETFs
ETFs come in all shapes, sizes and types to cover just about every inch and corner of the investable universe, including AI stocks.
For those who are not aware, ETFs are essentially baskets of stocks similar to mutual funds that invest in multiple stocks grouped by index, theme, style, sector, cap-size or just about any way you want.
There are more than 3,100 different ETFs in the U.S. markets alone. However, they differ from mutual funds in that they trade on the secondary market like individual stocks via stock exchanges.
The general appeal of an ETF is diversification as these funds can include tens, hundreds or even thousands of different stocks. Some are broadly diversified across a wide range of stocks and industries, while others are more concentrated in a single sector, industry or theme.
As the concept suggests, the growing number of AI-themed ETFs invest in stocks that in some way, shape or form are driven by AI. As these funds are concentrated in one area of technology, they are not as diversified as others and thus can be prone to more volatile swings. Thus, AI ETFs should only make up a fraction of a broadly diversified portfolio set aside for aggressive growth.
However, the real benefit of AI ETFs is that you don't have to do any stock picking. Either an asset-management team does it for you, or the choices are made passively by tracking an index of related stocks.
Depending on the fund, most include the best AI stocks at any given time based on the screens, criteria or index they follow. Thus, you don't have to be an expert to tap into the very best cutting-edge AI stocks.
Three Top AI ETFs
As previously mentioned, AI is becoming rapidly intertwined with tech stocks, so it can be a bit confusing to identify them. However, if you are looking for mostly pure-play AI ETFs, here are some good options.
The Invesco AI and Next Gen Software ETF (NYSEARCA:IGPT) invest in stocks that are in the STOXX World AC NexGen Software Development Index. This index consists of companies that focus on next-generation software themes, including AI and robotics.
Stocks in this ETF may be of any capitalization size, both U.S. and international. The fund is also weighted by market cap and is fairly broad, with 98 holdings.
The Invesco ETF's top three holdings are Alphabet (NASDAQ:GOOG), NVIDIA (NASDAQ:NVDA) and Meta Platforms (NASDAQ:META). It has a one-year return of 28.7% as of May 31 and a 10-year annualized return of 14.9% as of April 30. The ETF is up 16.2% year to date .
The Defiance Quantum ETF (NYSEARCA:QTUM) tracks the BlueStar Quantum Computing and Machine Learning Index, which includes companies on the forefront of machine learning, quantum computing, cloud computing and other transformative computing technologies.
The ETF includes stocks of all cap sizes and is equal-weighted. It is made up of 71 stocks , with MicroStrategy (NASDAQ:MSTR), NVIDIA, and Micron Technology (NASDAQ:MU) as the three largest holdings.
However, the largest position only accounts for 3.8% of the fund's assets. The Defiance ETF has a one-year return of 27.2% as of May 31 with a five-year average annualized return of 22.8%. It is up 14% YTD.
The Global X Artificial Intelligence and Technology ETF (NASDAQ:AIQ) tracks the Indxx Artificial Intelligence & Big Data Index, which follows companies that stand to benefit from the further development and utilization of AI technology in their products and services.
The ETF also includes the stocks of companies that provide hardware facilitating the use of AI to analyze Big Data. It has 84 holdings, with the three largest positions being NVIDIA, Chinese stock Tencent Holdings, and Qualcomm (NASDAQ:QCOM).
The Global X ETF holds about 69% of its portfolio in U.S. stocks, 9% in Chinese stocks, and 5% in South-Korean holdings, among other countries. It has a one-year return of 28% and a five-year annualized return of 17.5% as of May 31. The ETF is up 7% YTD .
Balancing risk with a key benefit of AI ETFs
To reiterate, these are highly concentrated funds in a volatile and growing area, so exposure should be limited in your portfolio.
However, the benefit of investing in AI ETFs is that they will give you access to the best AI stocks that would otherwise be hard to root out - with the added benefit of professional oversight and management.
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