Diversifying AI Investments Through ETFs
While the concept of exchange-traded funds (ETFs) is not new, many ETFs focused on artificial intelligence (AI) often concentrate heavily on a few major companies. For instance, NVIDIA Corp. (NASDAQ: NVDA) is the largest holding in the Global X Robotics & Artificial Intelligence ETF (NASDAQ: BOTZ), making up nearly 12% of the portfolio. Even broader tech ETFs like the iShares U.S. Technology ETF (NYSEARCA: IYW) have NVIDIA as a significant portion of their holdings, accounting for about 17% of the fund’s assets.
Some investors may prefer these ETFs because they offer exposure to well-known names in the AI space. However, in an industry that is rapidly evolving, a more diversified approach could help capture gains from lesser-known or emerging companies. Fortunately, there are several AI-focused ETFs that provide a broader range of investment opportunities across different areas of the AI sector.
A Broad Range of Companies Involved in AI
The First Trust Nasdaq Artificial Intelligence and Robotics ETF (NASDAQ: ROBT) targets companies involved in AI, robotics, and automation. The fund categorizes these firms into three groups: enablers, engagers, and enhancers, based on the Consumer Technology Association (CTA) classifications. These categories include companies that design, build, or facilitate AI and robotics through products and software.
This approach results in a well-diversified portfolio with over 100 holdings, many of which are not traditionally associated with AI. As of mid-August, the largest holding in the fund is Symbotic Inc. (NASDAQ: SYM), a robotics warehouse automation firm, which makes up 2.4% of the portfolio. This allows investors to gain access to a variety of companies that are actively engaged in AI, even if they are not household names.
ROBT has returned 9.7% year-to-date (YTD), slightly outperforming the S&P 500 and the Magnificent Seven as a group. With an expense ratio of 0.65%, it offers a reasonable cost structure for a specialized ETF.
A Narrower Focus with Strong Performance
The iShares Future AI & Tech ETF (NYSEARCA: ARTY) takes a different approach by tracking the Morningstar Global Artificial Intelligence Select Index. This index includes companies that are currently or expected to be critical to the development of generative AI, AI data and infrastructure, AI software, and AI services.
ARTY holds around 50 stocks, with the largest holding representing approximately 5.9% of the portfolio. Top holdings include less well-known names such as PTC Inc. (NASDAQ: PTC) and Japanese semiconductor component maker Advantest Corp. (OTCMKTS: ATEYY).
With higher assets under management (AUM) and trading volume compared to ROBT, ARTY offers better liquidity for investors. Its expense ratio of 0.47% is also more competitive. While ARTY provides exposure to fewer companies than ROBT, its YTD return of 11.4% makes it an attractive option for performance-driven investors.
International Focus and Strong Returns
The Robo Global Artificial Intelligence ETF (NYSEARCA: THNQ) offers a global perspective on AI firms, including those that enable AI applications through computing, data, and cloud services, as well as those applying the technology across various industries. With a strong international focus, THNQ's portfolio consists of 55 stocks from developed markets.
The largest holding in THNQ represents about 3.3% of the portfolio. Although high-profile names like NVIDIA are included, the fund also features smaller or more obscure AI companies. This mix has contributed to THNQ's strong performance, with a YTD return of 14.5%, the highest among the three ETFs discussed. However, THNQ comes with a slightly higher expense ratio of 0.68%, which is still lower than many actively managed funds.
Conclusion
Investors looking to diversify their AI exposure can consider ETFs that offer a broader range of companies beyond the usual big names. Whether focusing on robotics, automation, or international markets, these ETFs provide varied approaches to capturing growth in the AI sector. Each has its own strengths, whether in terms of performance, diversification, or cost, allowing investors to choose based on their specific goals and risk tolerance.
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