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Artificial intelligence has shaken up the investment landscape since the groundbreaking launch of ChatGPT in November 2022.
Since then, investors have been pouring money into everything AI-related in search of the next big winners. In 2023, a group of large technology companies christened the name “The Magnificent Seven” – Tesla, Amazon, Metaplatforms, Apple, Microsoft, alphabet And Nvidia – contributed largely to the market recovery.
This tailwind lasted through 2024, but even the winners eventually reach their limits. In fact, some of this year’s top performers came down to earth on Friday, with big tech names dragging the price lower 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 the risks involved. There are a lot of unknowns in AI right now.”
AI is expected to be a key theme as the technology transforms from early winners to second-stage adopters. Portfolio and asset managers say investors may want to pursue certain strategies if they are looking for long-term opportunities in this space.
What to look for
There is no secret formula for investing and picking stocks in the artificial intelligence space, but investors can keep an eye on certain metrics and trends when filtering out the winners from the duds.
Carol Schleif, chief investment officer at BMO Family Office, recommends that when investing in a new industry, investors should keep an eye on companies’ cash burn and how they spend their money. Pay attention to the finer details, including how a company processes a backlog and how much money it invests in infrastructure.
When it comes to chip stocks, Schleif also recommends taking a look at government subsidies. The industry won big in 2022 when President Joe Biden signed the CHIPS Act. The measure provided funds for the expansion of semiconductor production on US soil.
Samsung Electronics is close to funding CHIPS for semiconductor manufacturing in Texas Intel has received up to $8.5 billion from the measure.
“Focus on the underlying fundamentals and whether they are moving in the right direction. [rather] than just the results of the last quarter,” Schleif advised.
Investors should also avoid blindly chasing hot winners that have capitalized on the AI craze. For Nancy Tengler, CEO and CIO of Laffer Tengler Investments, that means taking a look at some of the old-economy stocks that are embracing the new digital wave. She likes Microsoft And IBMa pair of tech industry veterans.
When building a portfolio, financial advisors and portfolio managers emphasize the importance of diversification – and the same goes for 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 through ETFs
Choosing ETFs that include dozens of names can be a lower-risk way to diversify, said Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.
She emphasized that Global X Robotics and Artificial Intelligence ETF (BOTZ)The First Trust Nasdaq AI and Robotics ETF (ROBT) and the Global X Artificial Intelligence & Technology ETF (AIQ).
“This is a way to get attention without literally putting all your eggs in one basket,” BMO’s Schleif said. “You want to be able to focus on a few different ways to be able to withstand volatility.”
AI ETFs and their performance in 2024
| ticker | Surname | Expense ratio | %chg ytd |
|---|---|---|---|
| CLEANING | 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 & 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 initially rise when a new topic enters the mainstream, but often suffer volatility and pullbacks at some point, said Helen Dietz, CFP and managing director at Aspiriant.
“The newer the trend, the more volatile it is,” she said. “The corrections in these individual stocks or sectors can sometimes be quite severe, which is not uncommon, and this creates fear in the investing public.”
On that note, Nvidia shares suffered a setback on Friday, plunging 10% and posting their worst day since March 2020. The decline significantly reduced chip stock’s year-to-date gains, but it remains up almost 54% in 2024. Playing with AI Super microcomputer The stock also took a nosedive that day, falling 23%.
ETFs typically include a range of names and can vary in weighting. Although the BOTZ ETF and the Roundhill Generative AI and Technology ETF (CHAT) are both currently underperforming some of this year’s popular AI winners. However, the underlying names are varied: BOTZ keeps Nvidia and Robotics in the game Intuitive surgerywhile CHAT’s top holdings include Microsoft, Meta and service now.
Schleif recommends looking for ETFs with high trading volume that are backed by reputable companies. Investors should also pay attention to fees, which can reduce returns if fees are too high.
While gains may lag the rise of stocks like Nvidia and Meta, ETFs allow investors to have lower-risk exposure to the sector, Woods said. In the longer term, investors can also use the running of these funds to think about picking individual names later.
“The old cliche is to time the market and then hope you find the single stock that can really be the big performer,” Woods said. “If you want exposure, you want to be diversified and I think an ETF is the best way to achieve that.”
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2024-04-20 11:51:24
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