VettaFi Voices On: Investing in Artificial Intelligence

With the VettaFi Artificial Intelligence symposium coming up next week, it seems logical for the VettaFi Voices to tackle the topic. Is AI going to be a major part of our lives going forward? Is it worthy of being classified as a megatrend? What are the best ways to access it as an investment? What are investors overlooking about AI as an investment theme?

Roxanna Islam Swan, associate director of research: I think AI is definitely worthy of being considered a megatrend. When you’re looking at megatrend investing or thematic investing, I think there’s often a lot of hype and talk about growth. Some of that is justified and some is overblown.

Investors should ask themselves a few questions including: Is this just hype (i.e., is this a short term trend driven by excitement in stock prices) or is there a real use case? Are there or will there be enough players in this area to make the idea investable as a theme or is it more appropriate to support a couple of stocks?

For the first question — yes, there’s a lot of use cases out there. AI is basically programming intelligence that mimics human intelligence. And almost everything we do revolves around technology so in a sense could potentially have AI involved. When we turn on our phones and computers we get personalized recommendations for shopping and search engine suggestions. A lot of newer cars have self-driving features where they can read speed limit signs and accelerate and brake when appropriate. I went on a 12-hour road trip in my new car a few weeks ago and barely had to do anything! These are all just personal uses cases. But those multiply when you think about industrial use cases and how AI affects the way businesses work.

And for the second question — you can get exposure to AI using megacap stocks like Alphabet, Amazon, Microsoft, Nvidia, etc. However, that applies to almost every disruptive tech theme. You also have more specifically focused AI companies out there like C3.ai (AI) and Palantir Technologies (PLTR). There is an investable universe out there. I think a lot of investors do have a favorite stock or two.

A lot of investors may recognize that AI is an important theme, but it’s difficult to pick stocks especially since it’s a relatively newer industry, which can mean: 1) stocks are not all well-known and can be difficult to research, 2) few significant players with no clear market leaders, and 3) too many new entrants and/or fast exits to keep up with. That’s when it’s easier to look at an ETF.

And that could be a broader AI ETF like ROBO Global Artificial Intelligence ETF (THNQ) or the Global X Artificial Intelligence & Technology ETF (AIQ). Or it could also be one of the ETFs more focused on AI and robotics (not always the same thing) like the IRBO or the First Trust Nasdaq Artificial Intelligence & Robotics ETF (ROBT). Or maybe even an EV/autonomous vehicle ETF like the First Trust S-Network Future Vehicles & Technology ETF (CARZ), the iShares Self-driving EV & Tech ETF (IDRV) or the Global X Autonomous & Electric Vehicles ETF (DRIV).

Dave Nadig, financial futurist: The issue with AI is the same issue with most transformational technologies. It’s extraordinarily difficult to pick long-term, pure-play winners. Most of the economics generally roll up to entrenched players with enormous amounts of capital. That’s why if you look at THNQ, you find NVIDIA (NVDA), Microsoft (MSFT), Alphabet (GOOGL), and so on.

So what are people missing? Likely the more downstream use cases where the real value will be captured. For example: sure, Nvidia makes in-demand chips and just crushed earnings. But that’s now pretty well baked into prices. At the same time, I believe the next big advances in AI are all going to be software, IP and interfacing with systems.

While yes, it’s an exciting time, the real power of this hockey-stick moment we’re at in AI is how it’s going to transform things like retail (Been to an AI MacDonalds yet? It’s pretty wild!) or logistics. As annoying as it is, all those earnings calls we’re hearing where every company mentions AI 200 times — that’s actually important. If I was an analyst covering, say, Schlumberger, or Dupont, or Caterpillar, you can bet I’d be grilling management about how AI is going to impact their business. Because regardless of the business, it will.

Pure plays are hard to access and often become bubble valued. The bigger impacts are likely downstream, and the question should permeate the analysis of any company in 2023.

(This is, incidently, part of why I’m so excited to chat with Prof. Wyatt Newman of Case Western next week about how AI is really interfacing with the control systems in robotics. That’s where the rubber meets the road.)

Islam: Dave, I definitely agree about AI & logistics. That was a huge thing back when I was working on logistics stocks, especially when it came to warehousing. It was more about robotics a few years ago, but now it’s AI too. Funny how such an old-fashioned industry has now transformed into something futuristic.

I think it’s really hard to envision where any sort of technology can be in a few years. It’s usually unfathomable. Remember how we went from only landlines to comically large cell phones to handheld simple cell phones? Now we all have touchscreen phones. Everything has a touch screen interface now — even refrigerators. I don’t think a lot of people outside of the industry knew that was going to happen and be adapted so widely. I think it’s hard to envision just how impactful a technological change can be in a only a few years outside of what you hear from company management on earnings calls or investor days.

Heather Bell, managing editor: I wonder if the average person understands how thoroughly AI is already woven into the fabric of our lives. At the self-checkout at the grocery store, the scanner can recognize different produce items based on their appearance rather than a barcode. If you have an iPhone, you may be talking to Siri a lot or using the facial recognition capabilities to sign into different apps. If you use any streaming services, AI helps determine the music or movies that Spotify and Netflix recommend to you. You mentioned self-driving cars, Roxanna and as you noted, even regular cars have AI-related functions like self-parking.

I think given how ubiquitous AI is, investors definitely need exposure to it. Like you said, large-cap stocks like Amazon and Nvidia offer exposure. You also mentioned how AI-focused companies are hard to research but that there are existing ETFs that already take care of that. I do wonder how much you need to know about AI to choose between those funds.

Tom Lydon, vice chairman: AI-related ETFs come in a variety of disciplines that can be helpful for investors and advisors looking to participate in the AI revolution.

First, there are ETFs that focus on companies that are embracing AI to help their efficiencies and profitability. Obvious companies like Amazon, Google and Apple (AAPL) fall into this category, but AI is used and emphasized differently at each company. It’s important to understanding the direct impact to the company. It’s also important to under stand how the weighting allocation of each company in the ETF will impact the ultimate performance.

Next, there are ETFs that focus on companies who have identified AI as their core business. There are a number of growing businesses in this category. However, the overall market capitalizations of these companies are in the early stages.

Then, there are ETFs that use AI driven strategies to determine what companies to buy, how much to allocate and when to sell. These active strategies can take advantage of anomalies in the market that the average investor may not see.

Finally, there will be an ongoing debate about whether index-based AI strategies are better than active AI strategies. There is plenty of ETF choices on both sides. All of these will be covered in detail on the Aug. 30 AI Symposium.

Join VettaFi for an AI Symposium on August 30 at 11:00 AM ET and hear from thought leaders and experts about how AI will transform the way investing works. Register here.

For more news, information, and strategy, visit the Artificial Intelligence Channel.