Investing in AI: Unlocking Potential Amid Growing Opportunities
AI is currently a booming market, projected to exceed $243 billion this year and potentially triple by 2030. The industry features major tech companies trying to leverage their influence and younger, nimble firms racing to create the next big breakthroughs. However, investors should be cautious as many businesses are also trying to profit from the AI hype without offering substantial innovations.
For investors, the rise of AI presents both immense opportunities and significant challenges. The key question is how to identify the most promising up-and-coming AI stocks before they hit their peak. With concerns about the possibility of an AI bubble reminiscent of the dot-com boom 25 years ago, both the potential rewards and risks remain considerable.
Diversify with AI-Focused Exchange-Traded Funds (ETFs)
For those looking to balance their investments, AI exchange-traded funds (ETFs) can be an excellent option. These funds may concentrate specifically on AI firms, like the Global X Robotics & Artificial Intelligence ETF (NASDAQ: BOTZ), or could include broader tech exposure, such as the iShares Expanded Tech Sector ETF (NYSEARCA: IGM), as well as ETFs like the Direxion Daily Semiconductor Bull 3x Shares ETF (NYSEARCA: SOXL), which focuses on vital components in AI technology.
Global X Robotics & Artificial Intelligence ETF: A Niche Investment
The Global X Robotics & Artificial Intelligence ETF (BOTZ) targets both AI and robotics with an asset base of $2.6 billion and an average trading volume of around 600,000 shares as of January 15, 2025. While it holds fewer than 50 stocks, with a few dominating the portfolio—each comprising over 10%—the investment is fairly well-diversified.
This ETF is suitable for investors seeking diversified exposure to AI and robotics, though it does include some companies that are less engaged with AI. Keep in mind that the fund has a relatively high expense ratio of 0.68%.
The iShares Expanded Tech Sector ETF (IGM) features nearly 300 holdings, making it a comprehensive tech fund. Although it is not AI-specific, many companies within it are involved in AI development. With $5.7 billion in assets, the fund has demonstrated a strong performance, boasting a one-year return of 36.8% as of January 15, 2025, which is notably higher than the overall market.
Investors should note that IGM includes major tech firms like Apple Inc. (NASDAQ: AAPL) and Microsoft Corp. (NASDAQ: MSFT), which may lead to a concentration risk for individuals who already own shares in these companies.
The Direxion Daily Semiconductor Bull 3x Shares ETF (SOXL) is closely tied to the AI sector, as it provides 3x long exposure to a semiconductor index. This leverage allows for enhanced daily returns when the semiconductor market performs well, fueled by the strong demand from AI and other tech areas.
However, the inherent risks of leverage mean this fund is better suited for active traders with a high-risk tolerance.
Watch Out for AI Labels
Funds like IGM and SOXL highlight how investors can gain significant exposure to AI without investing in ETFs explicitly branded for the AI industry. Similar to companies that use AI in their names for marketing purposes but lack genuine innovation, many ETFs might follow this trend. By examining the holdings of an AI-focused fund and comparing them with traditional tech ETFs like the Technology Select Sector SPDR Fund (NYSEARCA: XLK), investors may find that they can achieve comparable AI exposure with a lower-cost generic fund.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
