Handshake between robot and human, AI generated image
AdobeStock / Ilia

Artificial intelligence (AI) has been the talk of the town since ChatGPT took the internet by storm in late 2022. And more investors and firms are joining the conversation.

Last year, investors watched as Nvidia’s stock soared 239% and broke records each quarter. The company makes chips that power AI tools like ChatGPT.

But not every company in the AI space is bound to see the same success. With the AI market still in its infancy, caution may be warranted.

Enter AI ETFs. These funds allow investors to mitigate individual company risks by investing in a fund with holdings across different sectors and companies, ranging from established tech giants to innovative startups.

“[Investing in AI ETFs] really offers you a diversified global basket of securities that have exposure to AI, and it’s across all the various AI sub-segments,” said Pat Chiefalo, head of ETFs and indexed strategies with Invesco Canada Ltd. in Toronto.

AI ETFs in Canada

Several asset management firms have launched AI ETFs over the past few years.

Evolve Funds Group Inc. is one. The Toronto-based firm partnered with AI software company Gradient Boosted Investment Inc., also known as Boosted.ai, to launch the Evolve Artificial Intelligence Fund (TSX: ARTI) in March.

Boosted.ai’s large language-model technology analyzes thousands of stocks to determine which companies are most likely to benefit from increased global adoption of AI.

In other words, humans don’t construct the portfolio.

“I always refer to it as like AI squared because you’re using AI to pick AI companies,” said Raj Lala, president and CEO of Evolve.

“[Boosted.ai is] referencing [about] 150,000 sources through their platform to identify the types of companies that we should be investing in — not just the big tech, but the smaller pure-play AI companies as well.”

The $2.8-million ETF has a 0.60% management fee and holds more than 50 firms. These include stalwarts such as Apple, Alphabet and Nvidia, as well as lesser-known companies like Astera Labs Inc., which sells high-powered chips used in AI, and Aurora Innovation Inc., a self-driving vehicle technology company.

Another AI ETF to enter the market this year is the Invesco Morningstar Global Next Gen AI Index ETF (TSX: INAI), which has a management fee of 0.35%.

Aside from mega-cap holdings such as Microsoft, Nvidia and Meta, the $153-million fund includes smaller-cap stocks in AI data and infrastructure companies, as well as AI service companies such as consulting firms. The ETF holds 50 companies.

“Our ETF is very, very liquid. You can do small resizes, or you can do very large institutional-quality sizes,” Chiefalo said, which allows for cost-efficient trading.

Global X Investments Canada Inc., formerly known as Horizons ETFs Management Inc., has a diverse lineup of ETFs that provide exposure to AI. This includes the Global X Robotics & AI Index ETF (TSX: RBOT), which launched in November 2017.

The $53-million fund invests in an index of companies that stand to benefit from the increased adoption of robotics and artificial intelligence, with a management fee of 0.45%.

This includes holdings in IT, industrial services, health care, consumer goods, financial and energy firms. Among them are Nvidia; Yaskawa Electric Corp, a Japanese robotics company; and Intuitive Surgical Inc., an American company that manufactures robotic products designed to improve clinical outcomes of patients.

Such AI-themed ETFs tend to resonate with tech-savvy people who enjoy learning about new technologies and buying the latest gadgets, said Naseem Husain, senior vice-president and ETF strategist with Global X in Toronto.

“These products are really calling out to them, saying, ‘I want to … align my investment dollars to take advantage of the things that I see that are really taking off and going to change the world,” he said.

Who should invest in AI ETFs?

AI ETFs are suitable for investors looking for high-risk investments with high capital growth over the long term, Chiefalo, Lala and Husain said.

However, Lala said these products should only make up a small allocation for most investors since there is a fair bit of volatility in the AI market — and the tech sector overall.

“I think that this can be a small component of your equity portfolio that is really targeted toward greater growth,” he said.

AI ETFs are also suitable for time-pressed investors, Husain said, noting these funds can use index rules, active managers and AI tools themselves to help screen for stocks.

If you’re a very conservative investor, however, there may not be a place for AI in your portfolio, Husain said, adding that such investors would be better off with a growth allocation that’s more focused on dividends or investments with lower volatility.

The outlook for AI ETFs

Generative AI is poised to become a $1.3-trillion market by 2032, Lala said, citing a report by Bloomberg Intelligence.

Given this forecast, he believes more investors will look to enter the AI market.

“I think we’re in the early innings of the AI growth, so if you want to participate in it, this is the right way for you to do it, especially because AI is going to continue to kind of cascade across so many different industries and continue to grow as well,” Lala said.

Chiefalo agreed, saying he expects to see more ETF issuers looking to capitalize on this growth as well.

The growth seen in the AI market already is raising eyebrows among investors, Husain said.

“Some of the ETFs in this category, including some of our own, have posted returns of over 60%. So, that immediately causes people to take a look and go, ‘Maybe it’ll do it again,’” he said.

“Past performance doesn’t necessarily mean those returns are going to happen, but they do wake people up.”