Exchange-traded funds (ETFs) focused on artificial intelligence (AI) are rapidly expanding, as asset managers create new investment opportunities to capitalize on the excitement surrounding AI. However, it remains uncertain which companies will ultimately succeed in the ongoing tech revolution.
According to data from Morningstar, more than one-third of the two dozen ETFs featuring AI in their names have been launched in 2024 alone. In the past week, three new ETFs joined the growing list, including a cloud computing ETF that has been rebranded and revamped to specifically target AI. The total assets in the AI ETF sector now stand at $4.5 billion, bringing it closer to the $5.5 billion size of the nuclear power-themed ETF universe, and placing it significantly above the cannabis sector, which has $1.37 billion in assets. “I’m not surprised their numbers are increasing,” said Daniel Sotiroff, a senior analyst at Morningstar. “This is a fast-growing and dynamic industry, and it’s easy to believe one could make substantial profits in a short time.”
The over 200% stock gain of chipmaker Nvidia—the poster child for AI—over the last 12 months likely reinforces this optimism, Sotiroff noted. Beyond Nvidia, AI is expected to create a wider range of winners in the future, said Tony Klm, head of the fundamental equities technology group at BlackRock. Klm manages two newly launched AI-themed ETFs from BlackRock: the iShares A.I. Innovation and Tech Active ETF and the iShares Technology Opportunities Active ETF.
The firm’s first AI-focused product, the $630 million iShares Future AI & Tech ETF, launched in 2018, currently trades just below a 52-week high recorded on October 14. While this initial product is index-linked, the two new funds are actively managed and aim to seize emerging opportunities in AI, according to Jay Jacobs, head of active and thematic ETFs at BlackRock. “The AI market is going to evolve dramatically,” Klm remarked. “What you think it is today will not be what it transforms into tomorrow, next year, or in the coming years.”
AI Arms Race
BofA Securities analysts Ohsung Kwon and Savita Subramanian released a report suggesting an “AI arms race” is occurring among major tech companies like Microsoft and Amazon.com. They estimate that these four megacap companies are projected to invest $206 billion in AI-related capital spending this year, a 40% increase from 2023. Conversely, they predict a slight decline in capital spending by the other 496 companies in the S&P 500. Additionally, venture capital firms are expected to direct as much as $79.2 billion in funding to AI startups by year’s end, which is a 27% increase from the previous year, according to estimates from venture firm Accel.
This means approximately 40 cents of every dollar invested by VC firms will go to an AI company. Investing in AI-themed ETFs, however, does not guarantee superior market performance. The largest of these funds, the Global X Artificial Intelligence & Technology ETF, has gained about 20% so far this year, compared to a 22% rise in the benchmark S&P 500.
Recently, Amplify ETFs rebranded an existing cloud-computing ETF to emphasize its new focus on emerging technology, renaming it the Amplify Bloomberg AI Value Chain ETF. “Now, we’re aiming to provide exposure to the cloud with a specific AI focus,” Nathan Miller, vice president of product development at Amplify, explained. He added that the long-term goal is to be prepared to profit once the substantial capital spending on AI begins to reflect in earnings and to stay ahead in identifying new opportunities. “Like every ETF firm, we are trying to offer investors something distinctive,” Miller concluded.