April 19, 2024

The impressive rise of artificial intelligence stocks like Nvidia has ignited serious interest in AI-themed exchange-traded funds. Investors are scrambling for exposure to this revolutionary technology that could reshape entire industries.

As such, the AI ETFs traded in the U.S. have swelled to $6.88 billion in assets under management as of February, up from just $2.55 billion a year earlier, according to Morningstar data.

Diverse AI Investment Themes Emerge  

ETF issuers are formulating a wide array of thematic products to satiate investor demand in this gold rush mentality to get in on the next big AI winner. Some funds provide a diversified basket of the largest and most established AI beneficiaries like Nvidia, Microsoft, and Google. 

Others take a more specialized approach, targeting niche segments like robotics, machine learning, natural language processing, and audio/image generation. Seven of the 18 diversified AI ETFs tracked by Morningstar have launched within just the last three years as demand exploded. 

An eighth fund was recently redesigned to focus more directly on artificial intelligence opportunities.  

It’s still so early in the evolution of this category…that investors are still sorting through the possibilities and placing bets on which themes and companies will be long-term winners,

said Will Rhind, founder and CEO of GraniteShares.

The feverish excitement around AI investing mirrors the speculative frenzies of previous technological revolutions like the dot-com boom of the late 1990sThose earlier crazes demonstrated how transformative new technologies can rapidly spawn colossal success.  

The rise of e-commerce giants like Amazon created mind-bending wealth for founder Jeff Bezos and investors who bought in early. More recently, pioneers of electric vehicles and renewable energy, such as Elon Musk’s Tesla, have enjoyed stupendous stock gains as those technologies went mainstream. 

Strategies for Tapping the Artificial Intelligence Boom

As money continues pouring into the AI space, ETF issuers rapidly expand their thematic fund lineups to cater to different investment styles. This will include risk appetites and convictions on where the next AI windfalls will be realized.  

For example, Global X found that its AI & Technology ETF, which caps Nvidia’s weighting at just 3%, has tripled in size over the last three months to $1.8 billion in assets. 

By comparison, its more concentrated Robotics & Artificial Intelligence ETF, which has over 20% of assets in the red-hot chipmaker, grew 20% over the same period.      

Other fund sponsors are taking a different tack, hunting for less obvious or “off-the-beaten-path” AI beneficiaries across retail, manufacturing, agriculture, and smartphones. Rene Reyna, head of thematic investing at Invesco, which offers an Artificial Intelligence & Next Gen Software ETF, said:

The conversations we have with investors don’t focus on finding the next Nvidia but more on recognizing that AI technologies are rapidly changing landscapes across the economy. We are also finding ways to gain exposure to some of this transformative growth.

While generalist AI funds focused on established leaders have dominated inflows, more specialized thematic offerings are emerging. 

For instance, the new Roundhill Generative AI & Technology ETF concentrates on companies positioned to profit from advances in cutting-edge areas like large language models and text/image generation, including stocks like Salesforce, Marvell Technology, and Lucid.

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