ETFs and the AI boom

by , 12th March 2019

If you’re looking for sexy growth areas of the market to invest in, you’ve got to consider Artificial Intelligence (AI). And there are several ETFs that can help you get involved without much hassle.

What is AI?

AI has lots of definitions but I like this one best: ‘a system’s ability to correctly interpret external data, to learn from such data, and to use those learnings to achieve specific goals.’

The crucial point is that as AI learns, it adapts. As a result, AI can take over fairly complex tasks traditionally performed by humans. Current applications include facial recognition and ‘recommendation engines’ – the engines that help sites like Amazon and Netflix predict what you’d like to watch or read next.  Netflix is continually learning about you as select your next binge watch, and with more and more information, it should be able to make better recommendations.

There’s also huge potential for cost-cutting with Robotic Process Automation (RPA), a fancy term for automating the back office. ‘Chatbots’ is another application with massive potential for growth. These bots use machine learning and text recognition to run through run of the mill questions that are often asked by customers on a website. Nuance and Servicenow are two companies that are particularly interested in the chatbot area.

But I think the most exciting AI application is self-driving vehicles. These vehicles use AI to ‘see’ the road and what’s on it, and then decide whether to accelerate, break or turn. The cars’ driving should continually improve as lessons are learned from previous successes and failures, and those lessons are shared across the cloud.

The importance of the cloud for AI means that major tech companies such as Google and Amazon are well placed to benefit. However, these big boys aren’t the only companies that stand to profit from the AI revolution, and there are ETFs that give you exposure to a wide range of stocks that have significant AI focus.

The ETFs

In this article, we’re going to concentrate mainly on two ETFs: the WisdomTree Artificial Intelligence UCITS ETF (WTAI) and the Amundi Stoxx Global Artificial Intelligence UCITS ETF (GOAI). They’ve both pretty new – launched within the last year – and I suspect they’ll probably grow substantially from here.

The Amundi ETF tracks a STOXX AI Global Artificial Index which I wrote about last year. Stocks are picked for the index by computers using ‘big data’ – basically looking for AI-related patents. Stocks are selected from any sector; the important point is that the company must have plenty of exposure to AI. There are currently over 200 stocks in the index and there are names in there which you wouldn’t necessarily associate with AI or technology. These include Bank of America, Boeing and GE. The stocks are equally weighted.

The WisdomTree AI ETF takes a different approach. WisdomTree has partnered up with CTA which is the company behind the CES trade show – it’s easily the biggest event for the consumer electronics industry. And CTA doesn’t just run CES. It also publishes research papers, including several on AI, and it operates an ‘AI working group’ which gives it yet more knowledge on the industry.

WisdomTree argues that CTA has unparalleled knowledge of what’s going on in AI, which means they’re well placed to select the right stocks for the WisdomTree Artificial Intelligence Index.

Index construction

If you’re wondering what kind of companies are included in the WisdomTree index, they include chip manufacturers, producers of high-speed communications equipment, infrastructure providers, algorithm providers and more.

CTA selects companies in the Nasdaq Global Index with some exposure to AI, and then splits them into three categories: Enhancers, Enablers, and Engagers.

Engagers are companies that sell AI products and services, and their main focus is providing those services. Blue Prism, which is listed in London, is a company in this category. They comprise 50% of the index by value.

Enablers comprise 40% of the index and include companies like Nvidia which provide key infrastructure for AI. Finally, Enhancers are companies like Google and Microsoft: they’re a prominent force in AI but their AI products or services aren’t a big part of their overall businesses. Enhancers comprise 10% of the index.

CTA then gives these companies AI ‘intensity scores’. These scores are awarded using a range of criteria, but the basic points are that AI should be important to the company, the AI work should be of value. Investment in AI R&D also boosts a company’s score.

Then the Engagers with the highest intensity scores are included in the index, and the same process applies for the Enhancers and Engagers. This gives an index with around 50 constituents. So you have a pretty concentrated approach and WisdomTree argues the ETF is ‘zeroing in on AI, it’s not just another tech fund.’

Chris Gannatti from WisdomTree told me: ‘We’re not trying to pick winners. We’re trying to be representative. Because AI is an industry where you don’t know what’s going to have tomorrow. There could be a breakthrough, or a new technology is launched….ultimately because of the way we’ve set up the portfolio, we can respond to that new environment quickly.’

Robots

Looking at London-listed ETFs, I think the WisdomTree and Amundi ETFs give you the purest AI exposure. But there are also ETFs available offering exposure to AI and Robotics. The best known are the iShares Automation & Robotics UCITS ETF (RBOT) and the L&G ROBO Global Robotics and Automation UCITS ETF (ROBO). You can read more about them in Are Robot ETFs just a fad?

Or you could go for a broader technology ETF such as iShares S&P 500 Information Technology Sector UCITS ETF (QDVE).

Let’s take a quick look at the constituents of these indices:

Here’s the top ten companies for WisdomTree ETF:

Company % of index
 Xilinx 6.4
Ciena 6.3
Cadence 5.4
Servicenow 5.3
Synopsys 4.8
Nuance 4.7
Appian 4.5
Flir Systems 4.1
Atos 4.0
Blackberry 3.9

 

There’s no point giving a top ten stocks list for the Amundi ETF as they’re equally weighted across more than 200 stocks.

Here’s the top five for the LGIM ETF:

Company % of index
iRobot 2.2
Cognex 1.9
Zebra 1.9
IPG Photonics 1.9
Brooks Automation 1.9

 

And here for the Ishares robo ETF:

Company % of index
Xilinx 1.8
Technology One 1.8
TOTVS 1.5
Garmin 1.5
Shanghai Baosight Software 1.4

 

And here are the top five for the broader S&P 500 technology ETF:

Company % of index
Microsoft 17.9
Apple 16.3
Visa 5.4
Intel 5.0
Cisco 4.8

 

You can see that the different ETFs give you different exposures, and the difference between the AI ETFs and the broader technology ETF is very striking. So I think there’s a decent case for investing in AI or AI/Robotics.

The biggest downside is that the valuations may be high after the long bull run, and the two main AI ETFs we looked at are focused on finding the most important AI companies. Not the best-value AI companies.

If you’re trying to choose between the Amundi and WisdomTree ETFs, there is a modest difference in charges – Amundi has a TER of 0.35% while WisdomTree has 0.4%. That difference probably isn’t big enough to make much impact in the end.

The difference in strategy for the two ETFs is likely to prove far more important, but it’s hard to know now which will win out. Personally, I have a mild preference for the WisdomTree fund because it’s more concentrated with around 50 holdings. It may be a higher risk/higher reward play.

I’m tempted to invest, but there’s nagging doubt in my head that now is not a good time to make any further tech investments – share prices may fall over the next year or so. So I’ll probably hold off for now.

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