AI’s mixed investment performance

You can’t pick up a newspaper nowadays without a reference to AI, and investors are just trying to get in on this trend. Still, for the most part, it’s hard to buy into the AI craze.

ETFs are shaping up to be the easiest way, although you could buy the underlying equities with exposure to the AI sector.

The equities to buy

Quant analysts at big French investment bank SocGen have scanned through the portfolios of the main listed US Artificial Intelligence ETFs to uncover the tech stocks most commonly held by these funds. They are Nvidia, Microsoft, AMD, Tesla, Autodesk, Salesforce, Alphabet, Adobe and Synopsys.

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Back here in the UK, there aren’t many AI ETFs, but we already have three funds with direct AI exposure and nearly £700m in assets under management between them. AI is hot.

But as with all focused, concentrated, niche, thematic exchange-traded funds, you’ll find a huge variation in what gets to be included in the index. The main distinction is whether AI is narrowly defined or whether robotics stocks are also included.

Beyond that robotics/automation inflection, there’s still a huge variation in how each of the indices underlying the ETFs define their basket of stocks.

ETF performance is mixed

For example, L&G’s Artificial Intelligence UCITS ETF is designed to track the ROBO Global® Artificial Intelligence Index's performance, which comprises 60 AI stocks in 11 subsectors and 16 countries. Meanwhile, the WisdomTree Artificial Intelligence UCITS ETF aims to track the Nasdaq CTA Artificial Intelligence Index, which uses a completely different methodology to select stocks. Nvidia and Microsoft are the top two holdings in L&G’s offering, while WisdomTree’s Nasdaq index holds C3.Ai and Uipath Inc as the top two positions.

Given the hype about AI, and the inflow of funds into this space, you might think that returns from these funds – most of which are quite new – would be impressive.

Sadly though, you’d be wrong. Their track record is pretty mixed. Some funds have outperformed the market over the past three years, but others have drastically underperformed.

Would I buy an AI ETF? Probably not. Frankly, if you want exposure to this space, why not just buy Nvidia and Microsoft? Both are highly profitable and heavily involved in the sector. In Nvidia’s case via their GPU chips and in Microsoft’s case via their stable of AI-related investments, including ChatGPT and Nuance, a leader in cloud-based AI software.