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Are ETFs a pathway to AI?

By Maja Garaca Djurdjevic
6 minute read

ETFs are becoming a popular way to capitalise on the growing AI trend.

Artificial intelligence (AI) related stocks have seen substantial gains, with the “Magnificent 7” returning over 106 per cent in 2023, significantly outpacing the Nasdaq 100 and S&P 500.

The AI market is projected to reach US$305.90 billion in 2024, growing at an annual rate of 15.83 per cent to reach US$738.80 billion by 2030, while the number of AI tool users is expected to increase to 729 million by 2030, up from 254 million in 2023.

Nvidia, a leading chip designer, exemplifies this growth, with its stock up 46 per cent this year after tripling in 2023, positioning Nvidia as the fourth most valuable company globally.

With advisers looking to capitalise on the AI trend on behalf of their clients, Manny Damianakis, head of sales at Global X ETFs Australia, believes ETFs provide simple access to AI, offering exposure to a diversified group of innovative companies.

“ETFs can offer exposure to those companies at the forefront of innovation which are often overlooked and harder to identify, beyond household names such as the Magnificent 7. Further, well-backed ETF providers are poised to innovate with new types of ETFs, pushing the boundaries of traditional investment opportunities,” Damianakis said.

“Given that the technology sector goes through bouts of volatility, ETFs can provide a means of gaining exposure to a diversified group of companies, thereby reducing the risk associated with single stock concentration. This approach means investors are no longer solely reliant on the performance of individual stocks. Instead, they capture broader market themes by investing in a basket of stocks with varying degrees of exposure to AI.”

AI ETFs can be implemented in a portfolio within a core and satellite model, which involves dividing portfolios into two distinct components – the “core” and “satellite” segments.

Core portfolio holdings should consist of high-conviction, long-term investments like ETFs in key asset classes, according to Damianakis, while satellite exposures, such as AI-themed ETFs, allow for targeted investments in specific trends with higher concentration risk.

He, however, stressed that some ETFs can be both core and satellite holdings, highlighting the importance of choosing a provider with strong educational resources, research, and customer service to support informed decision-making.

“The market’s enthusiasm for AI and its transformative potential shows few signs of abating. We are highly optimistic about the future of AI, not just as a trend that will persist for the next five to 10 years, but as a megatrend poised to transform industries and businesses far into the future,” Damianakis said.

Recent research by Global X showed that AI-related ETFs, particularly in semiconductors, have “exploded” in 2024.

In particular, robotics and artificial intelligence ETFs have more than doubled in terms of popularity compared to last year, while investors allocated over $53 million into semiconductor ETFs in the first three months of the year.

Cyber security ETFs also saw stronger levels of support, with local investors pumping some $30 million into cyber security ETFs so far in 2024, compared with just $270,000 in 2023.

Looking to capitalise on this trend, in April, Global X announced it is launching the Global X Artificial Intelligence ETF (ASX: GXAI) on the ASX, offering Australian investors exposure to innovation and growth in AI-related companies.

GXAI, which will be the first dedicated AI ETF launched in Australia, tracks the Indxx Artificial Intelligence & Big Data Index.

Speaking on the launch at the time, chief executive Evan Metcalf said the potential with the AI thematic is significant, with forecasts suggesting the global market could increase to US$300 billion by 2026.

“Artificial intelligence is still maturing, and with this natural evolution comes the potential opportunities for new applications,” Metcalf explained.

“GXAI offers investors a way to target the rapid advancements and capabilities of AI technologies across a range of industries and a diversified selection of companies.”

Citing that Global X has already seen a combined $125 million of inflows this year-to-date across Global X FANG+ ETF and the Global X Semiconductor ETF, which offer exposure to subsets of the AI theme, Metcalf believes there is a big appetite for AI-related ETFs in the local market.

“AI is not a flash in the pan, it’s a structural shift which will change industries and life as we know it.

“Australian investors can use GXAI to invest in leading companies across the value chain of this megatrend which are positioned to benefit from AI adoption and innovation. Hence, GXAI is a fitting addition to our product line-up as our thematic investing ethos is centred on longer-term opportunities.”

Betashares has had its Global Robotics and Artificial Intelligence ETF or RBTZ listed on the ASX since 2018. At the time of launch, the firm said RBTZ would provide access to companies involved in the production of or use of robotics and artificial intelligence products and services.

Among RBTZ’s portfolio holdings is Nvidia with a 10.7 per cent weight, followed by ABB Group with 9.4 per cent. RBTZ also holds names like C3, UiPath, as well as the integration of AI in industrial automation via robotics.

Speaking to InvestorDaily, Cameron Gleeson, senior investment strategist at Betashares, highlighted that the firm offers multiple ways to access AI, including the RBTZ ETF and the NDQ ETF, which provides exposure to the Nasdaq 100 and its leading mega-cap tech companies pioneering advancements in the AI sector.

Although aware of the increased interest AI companies are garnering, Gleeson emphasised that when considering AI-related exposure for a portfolio, investors and advisers alike should review the companies in the fund and decide whether they prefer broad exposure or a more targeted approach. He also warned of the need to be mindful of stock-specific risks associated with AI investments.

“The inherently disruptive nature of the emerging sectors, like AI, makes it much harder to pick companies that will maintain their leadership over the long-term,” the strategist said.

“For example, ASX-listed Appen was once an AI darling, but is now down 98 per cent from its 2020 highs. And while Nvidia has continued to power higher, it is a very volatile stock. As a result, it’s our view that investors should look to avoid concentrated bets on specific AI names.”

In any case, he noted, while AI and technology names have performed strongly, it doesn’t mean investors should forget the importance of diversification and building a robust portfolio.

“This means that investors should look to build a robust core that contains diversified exposure to Australian and international equities, bonds and other assets.”