How To Invest In AI

Technology giant IBM defines AI as the use of computers, machines and software “to mimic the problem-solving and decision-making capabilities of the human mind”. The goal of artificial intelligence applications is to solve problems faster and to automate tasks that have ordinarily been performed by people.

The tremendous amount of interest in AI began in November 2022, when OpenAI first released ChatGPT for use by the general public. This chatbot service uses natural language to create humanlike conversational dialogue. Users ask questions on any subject imaginable, and ChatGPT provides detailed answers.

But this platform is only the latest iteration of AI, a computer science discipline that’s waxed and waned in popularity since the 1950s.

“AI is not new,” says Michael Robbins, board member of private equity firm Blythestone and of London hedge fund UEC. “The hype around ChatGPT stems from growing awareness of what AI might mean for the economy.”

The term “artificial intelligence” was coined in 1956 by John McCarthy of MIT and Marvin Minsky of Carnegie-Mellon University. That year the two academics hosted a workshop titled the Dartmouth Summer Research Project on Artificial Intelligence that sought to define the basics of AI.

Enough with the history lesson. Analysts at PricewaterhouseCoopers, or PwC as it’s known in Australia, believe AI innovations could raise global gross domestic product by as much as 14% by 2030. That kind of growth would make AI “the biggest commercial opportunity in today’s fast changing economy,” writes PwC.

There are several different ways to invest in AI today. You can buy the stocks of public companies that develop AI software and manufacture the hardware that runs AI applications. Alternatively, there is an emerging category of exchange-traded funds that invest in artificial intelligence companies.

Invest in Companies Benefitting from AI

Buying individual stocks is always more risky than owning funds. But if you are comfortable with the extra risk—and prefer to benefit from potentially greater returns—here’s a look at three of the best AI stocks available on the market.

• Microsoft (MSFT). Satya Nadella, the CEO of Microsoft, has stated that his company is betting everything on AI. MSFT has a partnership with OpenAI to integrate ChatGPT with its Bing search engine. In addition, it’s integrating AI with Microsoft 365, the cloud-based version of its popular suite of office productivity applications. AI helps users write text in Word, visualise maps and charts in Excel, and streamline their email inboxes. Shares of MSFT are up more than 40% year to date.
• Nvidia (NVDA). This semiconductor stalwart has thrived on making computer chips that power 3D graphics, cryptocurrency mining, and other applications from robotics to medical imaging. In recent years, Nvidia chips have proven popular for running the powerful algorithms that are the backbone of AI applications. Shares of NVDA have soared more than 200% year to date, and Australian investors can access the stock via the Nasdaq. You can read more about Nvidia, and whether it’s worth investing in, in our guide.
• C3.ai (AI). As its name suggests, this company is an artificial intelligence pure-play whose entire business is implementing AI solutions for its customers. And a quick look at just a few of C3.ai’s customers indicates the breadth of AI’s potential impact on the economy: oil and gas giant Shell, mining powerhouse Koch Minerals, packaging provider Ball and the US State Department. They use C3.ai services to boost reliability, detect fraud, monitor computer networks, optimise supply networks and manage energy use. The company’s shares have skyrocketed more than 250% year to date—although the longer-term chart provides a cautionary lesson, as the stock’s price is 70% below its 2020 all-time high.

Just because Microsoft, Nvidia and C3.ai have been big winners this year does not mean they are necessarily the best equity investment for you right now.

For one thing, AI stocks have grown pricier, making their valuations less enticing. A basket of AI stocks created by J.P. Morgan Securities was up 42% for the year versus the S&P 500—a proxy for the overall stock market in the US—as of July 10. The broader technology sector was up 25% versus the benchmark index.

Another reason for caution is that AI stocks could pause to digest their gains. “It’s possible that in the short term, AI companies may do worse than the broad market,” says Robbins.

Finally, successful AI stocks may not be future winners. Two of the three AI stocks listed above are mega-cap companies. But history shows that smaller, nimbler growth stocks are more likely to introduce and profit from groundbreaking new products and services.

Buy AI Exchange-Traded Funds

Putting your dollars to work in AI-themed ETFs is a lower-risk alternative to owning AI stocks.

Leading ETF fund families are adding to their existing offerings or launching new funds to capitalise on the booming demand for AI investments. In 2023 to date, inflows to AI ETFs are up more than 70% in the US—compared to a 2% gain for all US-listed stock ETFs.

In the US, there are 17 ETFs whose focus is at least largely AI or its kissing cousin, machine learning, according to ETF.com. They own the stocks of companies that produce products like computer chips for AI industries or that use AI in their own businesses.

In Australia, ETFs are increasingly popular. In fact, an ASX study has found that the number of us investing in ETFs has risen by more than 30% over the last three years, with one in five investors now owning a stake in one or more ETF. In Australia, there are no ETFs that invest directly in AI, but there are a range that focus on exposure to the technology that underpins artificial intelligence. Here are a few AI-themed ETFs on the ASX that investors may wish to research:

• BetaShares Global Robotics and Artificial Intelligence ETF (ASX: RBTZ). RBTZ offers exposure to the top companies expected to benefit from the increasing adoption of robotics and AI, specifically those invested in autonomous vehicles and drones, industrial robotics and automation, non-industrial robots, and, of course, AI itself.
• Global X ROBO Global Robotics & Automation ETF (ROBO). Issued by Global X Management, ROBO features broad exposure to a range of markets, including in Asia and Europe. Similar to RBTZ, the fund invests in companies that may benefit from increased uptake of robotics and AI, including both industrial robotics and automation, and non-industrial robots.
• BetaShares S&P/ASX Australian Technology ETF (ATEC). This ETF aims to track the performance of the S&P/ASX All Technology Index and provide exposure to leading ASX-listed tech companies, covering sectors such as consumer electronics, online retail and medical technology.

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Getting in on the ground floor of a new technology trend like AI can be exciting and enriching for investors. However, it’s worth keeping in mind that like everything else in the stock market, AI is also subject to the reality of the hype cycle.

New tech breakthroughs inspire dynamic new companies and tonnes of media coverage, which drive stock prices through the ceiling. But triple-digit annual gains never last, and eventually the market separates a few winners from a lot of losers. Incautious investors can get burned.

If you’re considering investing in AI, the first step is to do plenty of research. Read up, learn about the technology and evaluate the risks before you buy. There’s no need to go all-in on AI—prudent investors depend on diversification to make sure they make the most of their investing dollars. Consider discussing your AI investing ideas with a financial advisor.

The advice and information provided by ForbesAdvisor is general in nature and is not intended to replace independent financial advice. ForbesAdvisor encourages readers to seek expert advice in relation to their own financial decisions and investments.