Artificial intelligence and machine learning ETFs could be the next wave of products to deliver some decent performance. If you missed the FAANG run, then this could be where investors can capitalise on the latest wave of innovation.
One of the benefits of AI is that it isn’t just for one single sector, it can permeate into pretty much all industries. This means that not only will it be able to disrupt certain sectors, it will be able to offer investors a different way of getting access.
The chances are you have already stumbled across it in some form or another just by being on the internet. For example, social media uses it when displaying adverts based on your user activity.
Blockchain also uses it to a greater or lesser extent. So too do systematic hedge funds where algorithms are used based on indicators in the market. These information leads are designed to give them advantages over competitors. The more sophisticated the machine learning and algorithms, the more likely they are to win.
They are also beginning to outperform equities, which have been on a bull run for the past decade.
Richard Lightbound, CEO, EMEA and Asia, of ROBO Global, said: "Recent headlines have left a lot of people wondering where to invest next.
"Robotics and AI investments have been the market’s best kept secret for a while but whilst ongoing political issues have sent the stock markets into a frenzy, companies focussed on delivering on the promise of robotics and AI have quietly risen to the top."
The chart below shows the S&P 500 in orange, the FTSE 100 in purple and the best performing AI ETF on the London Stock Exchange this year, the Lyxor Robotics & AI UCITS ETF (ROAI) in black.
“Companies are evolving to capitalise on the power of AI, taking on new paths which are decidedly paying off. An example of this being Ambarella, a leading video processing company and now one of the top AI processing companies,” says Lightbound.
It’s also clear that AI is beginning to seep into more and more companies that are developing it to suit their requirements. Because of this, now could be one of the best times to invest before the next wave of investors catch on.
Lightbound explains: “More and more businesses are attributing capital to AI development and some are already seeing growth. Areas such as 5G infrastructures, networking and memory demand will be some of the drivers to continue investing.
“While there are companies such as Ambarella, Manhattan Associates, Teradyne and Ocado Group who are certainly leading the way from a growth perspective, many more are quietly paving a steady path towards long-term expansion. For investors seeking a strategy that captures the rewards of tomorrow’s winners, now is the time to invest in Robotics, Automation and AI.”
The largest AI ETF by assets is the iShares Automation & Robotics UCITS ETF (RBOT), which has $2.106bn in AUM. The total assets of the ETFs listed below comes to just over $3bn in AUM, which is still a relatively small amount.
The range of ETFs on offer is varied. Some have been around for a while, one of the oldest being L&G’s ROBO Global Robotics and Automation UCITS ETF (ROBO) – but others are newer on the market and have different exposures.
One of the ones launched recently is Ossiam’s OWLP, the Ossiam World Esg Machine Learning UCITS ETF, which uses a quantitative model to implement a rule-based approach. The approach picks stocks from developed markets using financial data and ESG ratings. An optimisation procedure is then used to determine the weights of the equities which are selected by the quantitative model. It’s actively managed.
But don’t let this put you off.
It has returned 4.3% over the past three months, which compares to iShares RBOT which has returned 6.3% in the past three months. Not a huge difference, a slightly different TER, with OWLP costing 0.65% and RBOT costing 0.40%, rather shows that there isn’t a huge discrepancy between the passive and active approaches in this industry.
However, the sector is still the new kid on the block and not everyone is convinced. BNY Mellon alongside CREATE-Research have put out a paper analysing AI investing and climate change and how they will shape the investment landscape. It found that currently the asset management industry is underprepared.
It defines AI as "being used to generate the Fourth Industrial Revolution, or Industry 4.0, AI is recognised as an all-embracing technology capable of permeating almost every activity in the value chain of all industries in a modern economy.
"The arrival of the electric car is one of its most visible manifestations. The other is the advent of superfast 5G wireless networks that open up a revolutionary opportunity to offer groundbreaking services such as remote surgery, while robots respond precisely to remote instructions with zero latency."
It is anticipated to be a trend that “will be the defining challenge not just for the current generation of asset managers but for generations to come. We hope this report shines a light into the approaching maelstrom and helps its readers formulate their own responses to the coming change,” states the report.
While returns have been good this year as the below chart shows, it’s important to do your own research before investing.
The ETFs listed below are some of the AI ETFs on offer on the London Stock Exchange.
ROBO Global Artificial Intelligence Index
ETFYTD ReturnBase currencyTERIndexL&G Artificial Intelligence UCITS ETF (AIAG)n/aGBP0.49%L&G Artificial Intelligence UCITS ETF (AIAI)n/aUSD0.49%ROBO Global Artificial Intelligence IndexLyxor Robotics & AI UCITS ETF (ROAI)27.47%USD0.40%Rise of the Robots NTR IndexL&G ROBO Global Robotics and Automation UCITS ETF (ROBO)20.14%USD0.80%ROBO Global Robotics and Automation UCITS IndexL&G ROBO Global Robotics and Automation UCITS ETF (ROBE)24.05%EUR0.80%ROBO Global Robotics and Automation UCITS IndexL&G ROBO Global Robotics and Automation UCITS ETF (ROBG)23.42%GBP0.80%ROBO Global Robotics and Automation UCITS IndexiShares Automation & Robotics UCITS ETF (RBTX)27.28%GBP0.40%iSTOXX® FactSet Automation & Robotics IndexiShares Automation & Robotics UCITS ETF (RBOT)23.94%USD0.40%iSTOXX® FactSet Automation & Robotics Index