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Artificial intelligence has shaken up the investment landscape since the revolutionary launch of ChatGPT in November 2022.
Since then, investors have been pouring money into all things AI, looking for the next big winner. In 2023, a group of major tech players became known as the “Magnificent Seven.” Tesla, Amazon, Meta platforms, Apple, Microsoft, Alphabet And Nvidia — contributed to much of the market rally.
These tailwinds continued into 2024, but even winners eventually reach their breaking point. Indeed, on Friday, some of this year’s most successful pilots came down to earth, with the names of big tech companies dragging them down. Nasdaq Composite by more than 2%.
“You have to do your job,” said Jay Woods, chief global strategist at Freedom Capital Markets. “You want to do your research, you want to know what you’re buying, you want to know what the risks are with it. There are a lot of unknowns in AI right now.”
Artificial intelligence may become a central theme as technologies move from early-stage winners to second-stage adopters. Portfolio and asset managers say investors may want to adopt certain strategies if they are looking for long-term plays in the space.
What to look for
There’s no secret formula for investing or picking AI stocks, but investors can keep an eye on certain metrics and trends to help weed out the winners from the losers.
When investing in any new industry, Carol Schleif, chief investment officer of BMO Family Office, recommends investors watch companies’ cash burn and how they spend their money. Pay attention to small details, including how the company handles the backlog and how much money it allocates to infrastructure.
When it comes to chip stocks, Schleif also recommends looking at government grants. The industry made big strides in 2022 when President Joe Biden signed the CHIP Act. This measure allocated funds to develop semiconductor manufacturing in the United States.
Samsung Electronics is in line to receive CHIPS funding for semiconductor manufacturing in Texas, and Intel The measure resulted in awards of up to $8.5 billion.
“Focus on the fundamentals and whether they are moving in the right direction. [rather] than just last quarter’s profit,” advised Schleif.
Investors should also avoid blindly chasing hot winners that have benefited from AI enthusiasm. For Laffer Tengler Investments CEO and CIO Nancy Tengler, that means studying some of the old economy stocks that are embracing the new digital wave. She likes Microsoft And IBMa pair of tech industry veterans.
When constructing any portfolio, financial advisors and portfolio managers emphasize the importance of diversification—and the same applies to AI.
An exchange-traded fund could be a good way to get diversified exposure to a basket of stocks that could benefit from the AI theme, rather than sticking with one or two promising names.
Consider diversifying with ETFs.
Selecting ETFs that include dozens of names can be a way to diversify with less risk, says Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.
She stressed Global X Robotics and Artificial Intelligence ETF (BOTZ), First Trust Nasdaq AI and Robotics ETF (ROBT) and Global X Artificial Intelligence and Technology ETF (AIQ).
“This is one way to get some exposure without putting all your eggs in one basket,” BMO’s Schleif said. “You want to be able to focus on several different areas so you can withstand volatility.”
AI ETFs and their performance in 2024
| Ticker | Name | Expense ratio | % changes since the beginning of the year |
|---|---|---|---|
| BOTC | Global X Robotics and Artificial Intelligence ETF | 0.68% | 0.53% |
| ROBT | First Trust Nasdaq AI and Robotics ETF | 0.65% | -10.34% |
| AIQ | Global X Artificial Intelligence and Technology ETF | 0.68% | 0.90% |
| CHAT | Roundhill Generative AI and Technology ETF | 0.75% | 3.20% |
Source: fund websites, FactSet
Volatility can be a bitter pill to swallow, especially for new investors. Stocks tend to rise initially when a new topic becomes mainstream, but at some point they often suffer from volatility and pullbacks, says Helen Dietz, CFP and managing director at Aspiriant.
“The newer the trend, the more volatile it is,” she said. “The correction in these individual stocks or these sectors can be quite sharp at times, which is not unusual, and investors are spooked by it.”
As a result, Nvidia shares suffered a setback on Friday, when they fell 10% and had their worst day since March 2020. The decline has taken a significant toll on the chip stock’s year-to-date gains, but overall it remains up nearly 54%. 2024. AI Playmate Super Micro Computer also fell sharply that day, falling 23%.
ETFs typically include a number of names and can vary in weighting. Although the BOTZ ETF and Roundhill Generative AI and Technology ETF (CHAT) are currently trailing some of this year’s popular AI winners. However, the main names are different: BOTZ owns Nvidia, and robotics plays Intuitive Surgicaland CHAT’s largest holdings include Microsoft, Meta and ServiceNow.
Schleif recommends looking for ETFs with high trading volume and backed by reputable companies. Investors should also be aware of fees, which can eat into profits if they are too high.
While returns may not match the gains of stocks like Nvidia and Meta, ETFs allow investors to gain exposure to the sector with less risk, Woods said. Over the long term, investors can also use the leadership in these funds to consider selecting individual names in the future.
“The old cliché is to time the market and then hope you find that individual stock that can actually make a big profit,” Woods said. “If you want to participate, you want to be diversified, and I think ETFs are the best way to do that.”