Artificial intelligence – or AI – may sound like a sci-fi concept that remains a distant possibility, but the odds are that you’ve already interacted with some form of AI. For example, Facebook Inc. (FB) uses AI to recognize faces in images that users post, Alphabet Inc. (GOOGL) uses AI to predict what you’re searching for before you’re even done typing and Amazon Inc. (AMZN) uses AI to predict what products you’ll buy.
In this article, we’ll take a look at the best exchange-traded funds (ETFs) for investors to consider in the artificial intelligence space.
Growth in AI
Artificial intelligence is widely seen as a technology that will replace human work. While robots have taken a lot of manufacturing jobs, artificial intelligence has thus far only complemented knowledge workers by making their jobs easier. Mustafa Suleyman, co-founder of Alphabet’s DeepMind, believes that AI is still decades away from replacing knowledge workers on a large scale, although it’s something people should “pay attention to.”
According to ReportsnReports, the artificial intelligence market is expected to grow at a 53.65% compound annual growth rate from $419.7 million in 2014 to $5.05 billion by 2020. Machine learning technology is expected to account for the largest share of the growth as it’s used to improve media and advertising, as well as the financials sector. Furthermore, artificial intelligence as a replacement for human intelligence could emerge over the next five years.
Over the longer term, these technologies could be used to solve complex financial problems and develop healthcare solutions pertaining to clinical trials and related studies. A great example would be assimilating the data from millions of clinical trials in order to find similarities that investigators could then target for the treatment of certain diseases. These kinds of drug discovery applications could generate billions in revenue for biotech firms leveraging AI.
Investing in AI
There are many different companies that are actively focused on research and development activities in the artificial intelligence industry. While oftentimes these companies are focused on a particular segment of the AI market, such as healthcare or e-commerce, there are also several companies that are researching AI in a purer sense, including IBM and Alphabet.
According to Reportsnreports, some of the top publicly traded companies in the global AI market include:
Most investors might be better off investing in ETFs since they provide instant diversification across the entire industry. Global X recently launched its Robotics & Artificial Intelligence Thematic ETF (BOTZ ) that provides exposure targeting the industry with an expense ratio of 0.68%. The ETF’s top holdings include SMC Corp. (SMECF) and ABB Ltd. (ABB) at around 8% of the portfolio a piece.
The Robo Global Robotics & Automation Index ETF (ROBO ) is another option for investors to consider with a 0.95% expense ratio. Some of the fund’s largest holdings include iRobot Corp. (IRBT) and Cognex Corp. (CGNX), although no single stock accounts for more than 2.5% of the portfolio. This makes it a more diversified option than the Global X ETF that’s focused on artificial intelligence.
ETFdb’s Stock Exposure Tool can help investors find additional ETFs that have significant holdings in companies focused on AI research and development. In addition, investors can check their existing holdings to see how much exposure they already have to these companies.
Risks to Consider
Investors should keep in mind that there are several important risk factors to consider when investing in emerging technologies like artificial intelligence.
Some of these key risk factors include:
- Expense Ratios. Many specialized ETFs have higher expense ratios than broad market index ETFs, which means that investors should factor in these costs.
- Indirect Exposure. Many companies involved in AI R&D are also focused on other industries, which could increase their risk in these areas. For example, Alphabet Inc. has an AI research division, but its stock trades based on its ad division’s performance.
- Long-term Play. Artificial intelligence remains in its infancy, although it’s seeing strong double-digit growth rates. Investors should be aware that the industry could take decades to fully mature and deliver exceptional value.
The Bottom Line
The artificial intelligence industry is already worth more than $400 million per year and is expected to grow at a 50%+ clip to more than $5 billion by 2020. Investors looking to capitalize on these opportunities may want to consider the Global X Robotics & Artificial Intelligence Thematic ETF (BOTZ ) as a pure-play or other ETFs that have overweight holdings of companies involved in R&D focused on machine learning and AI.