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Since the groundbreaking launch of ChatGPT in November 2022, artificial intelligence has shaken up the investment landscape.
Since then, investors have poured money into everything related to artificial intelligence, looking for the next big winner. In 2023, a group of major technology companies known as the “Big Seven”— Tesla, Amazon, meta platform, apple, Microsoft, letter and Nvidia – Contributed significantly to the market’s rise.
These tailwinds continue into 2024, but even the winners eventually hit their limits.In fact, some of this year’s top performers landed on Friday, with big tech names dragging down Nasdaq Index More than 2%.
“You have to do your job,” said Jay Woods, chief global strategist at Liberty Capital Markets. “You want to do research, you want to know what you’re buying, you want to know the risks involved. There are a lot of unknowns in the field of artificial intelligence right now.”
Artificial intelligence is expected to become a central theme as the technology transitions from early-stage winners to second-stage adopters. Portfolio and wealth managers say there are certain strategies investors may want to pursue if they want to pursue long-term exposure in the sector.
what to look for
There’s no secret formula for investing in and picking artificial intelligence stocks, but there are certain indicators and trends that investors can focus on when sorting the winners from the losers.
Carol Schleif, chief investment officer at BMO Family Office, advises investors to pay close attention to a company’s cash burn and how they spend it when investing in any new industry. Pay attention to details, including how the company is handling its backlog and how much it is investing in infrastructure.
When it comes to chip stocks, Schleife also recommends focusing on government subsidies. The industry received a huge victory in 2022 when President Joe Biden signed the CHIPS Act into law. The measure allocates funds to build semiconductor production stateside.
Samsung Electronics expected to receive CHIPS funding to manufacture semiconductors in Texas, while Intel Already, up to $8.5 billion has been awarded from the measure.
“Focus on the fundamentals and whether they are moving in the right direction, not just last quarter’s earnings,” Schleife advised.
Investors should also avoid blindly chasing popular winners that benefit from enthusiasm for artificial intelligence. For Nancy Tengler, chief executive and chief information officer of Laffer Tengler Investments, that means focusing on some old-economy stocks embracing the new digital wave.she likes Microsoft and International Business Machines Corporationa pair of tech industry veterans.
When building any investment portfolio, financial advisors and portfolio managers stress the importance of diversification—and this applies to artificial intelligence as well.
Exchange-traded funds can be a good way to diversify into a basket of stocks that could benefit from the artificial intelligence theme, rather than sticking to one or two promising stocks.
Consider diversifying your investments through ETFs
Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland, says choosing ETFs that include dozens of names can be a lower-risk way to diversify.
she emphasized Global X Robotics and Artificial Intelligence ETF (BOTZ)this First Trust Nasdaq Artificial Intelligence and Robotics ETF (ROBT) and the Global X Artificial Intelligence & Technology ETF (AIQ).
“It’s a way to get some exposure without having to put all your eggs in the proverbial basket,” BMO’s Schleife said. “You want to be able to focus on a few different avenues so that you You can withstand fluctuations.”
AI ETFs and their performance in 2024
| stock ticker | Name | expense ratio | Year to date % change |
|---|---|---|---|
| clean | Global X Robotics and Artificial Intelligence ETF | 0.68% | 0.53% |
| robot | First Trust Nasdaq Artificial Intelligence and Robotics ETF | 0.65% | -10.34% |
| Love IQ | Global X Artificial Intelligence and Technology ETF | 0.68% | 0.90% |
| chat | Roundhill Generative Artificial Intelligence and Technology ETF | 0.75% | 3.20% |
source: Fund website, FactSet
Volatility can be a bitter pill, especially for new investors. Helen Dietz, CFP and managing director at Aspiriant, said that when a new theme becomes mainstream, stocks tend to rise initially but tend to experience volatility and pullbacks at some point.
“The newer the trend, the more volatile the trend is,” she said. “It’s not uncommon for these corrections in individual stocks or sectors to sometimes be quite dramatic, and the investing public to be scared.”
For this reason, Nvidia’s stock price suffered a heavy setback on Friday, plunging 10%, recording its worst single-day performance since March 2020. %. super microcomputer It also plummeted 23% that day.
ETFs typically include a range of names and the weightings may vary. That’s despite the fact that both the BOTZ ETF and the Roundhill Generative AI and Technology ETF (CHAT) are currently lagging some of this year’s popular AI winners.However, the underlying names vary: BOTZ holds Nvidia and Robotics intuitive surgerywhile CHAT’s major holdings include Microsoft, Meta and Immediate service.
Schleif recommends looking for ETFs with high trading volume and backed by reputable companies. Investors should also be aware of fees, which can impact returns if they are too high.
Woods said that while the gains may be lower than those for stocks like Nvidia and Meta, ETFs allow investors to gain lower exposure to the sector. Investors can also leverage these funds’ leadership positions to consider picking individual names further over the long term.
“The cliché is to time the market and then hope you find individual stocks that are really outperforming,” Woods said. “If you want to get involved, you want to diversify, and I think ETFs are the best way to do that.”
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