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The potential of artificial intelligence (AI) to power the future economy – everything from e-payments and smart assistants to self-driving cars and manufacturing robots – has lured many investors and sent shares of the niche technology companies soaring over the past year.

Many investors are also buying AI-theme exchange-traded funds to make broader bets on the increased use of human-mimicking machines to increase productivity and drive economic growth.

Investors like these thematic plays in part because they have “an interesting, exciting, hopeful, forward-looking narrative that people tend to latch on to,” says Ben Johnson, director of global ETF research at Morningstar.

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However, he recommends investors approach the category with caution.

“Spinning a yarn about artificial intelligence and all its potential future applications is much more compelling,” Mr. Johnson says. “Whether or not the investment results will be durable long term is another story entirely.”

For investors willing to bet on the future of AI through ETFs, Mr. Johnson says they can be broken down into three main categories: ETFs that invest solely in companies creating AI applications; funds that invest in companies that use AI within their operations, and ETFs that use AI to pick stocks.

Below are some options in each category:

Investing in AI applications

One AI-focused ETF Mr. Johnson points to is the Horizons Big Data Hardware Index ETF (HBGD-T), which follows the Solactive Big Data & Hardware Index that tracks global companies focused on data development, storage and data management services.

HBGD holds 46 stocks, has about $17-million in assets under management (AUM), a management expense ratio (MER) of 0.54 per cent and has returned a whopping 149 per cent over the past year. (All data from Morningstar as of Aug. 5.)

Some of its top holdings include chip technology developer eMemory Technology Inc. – which has a one-year return of about 130 per cent – and chipmaker Nvidia Corp., which has returned about 80 per cent.

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Alan Fustey, a portfolio manager with Adaptive ETFs in Winnipeg, points to the Horizon’s Robotics and Automation Index ETF (RBOT-T) as a more concentrated ETF in the AI applications space. It has $61-million in AUM, an MER of 0.59 per cent and a one-year return of 32 per cent. It holds Nvidia, Intuitive Surgical Inc., which develops robotics for surgery, and robotics company Fanuc Corp.

A broader fund is the iShares Robotics and Artificial Intelligence Multisector ETF (IRBO-A), which holds 107 different stocks and has “dramatically different” holdings than RBOT, Mr. Fustey says. Some of the holdings include touch-display maker Parade Technologies Ltd., cloud software company Domo Inc. and database and analytics software maker Teradata Corp. IRBO has about US$440-million in AUM, an MER of 0.47 per cent and a one-year return of 36 per cent.

Pavan Khaira, an associate of investment products and platforms with iA Private Wealth, likes the AI-focused ROBO Global Robotics and Automation ETF (ROBO-A) because it is a broad, global ETF with more than 80 stocks, including large, mid- and small-sized robotics and automation stocks.

It has assets of US$1.8-billion, much larger than some of its peers, an MER of 0.95 per cent and a one-year return of about 42 per cent. Its top holdings include Intuitive Surgical, software company ServiceNow Inc. and biotech company Illumina Inc.

Another AI-focused ETF Ms. Khaira points to is the Global X Robotics and Artificial Intelligence ETF (BOTZ-Q), which invests in companies that stand to benefit from the use of robotics and AI. Its 36 holdings include sensor maker Keyence Corp and robotics company ABB Ltd., to name a few. It has an MER of 0.68 per cent, US$2.5-billion in assets and a one-year return of 32 per cent.

These AI-focused ETFs stand to benefit as more and more companies realized during the pandemic how they can benefit from using some AI technologies, such as robots sanitizing hospital rooms or packing boxes in warehouses, she says.

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“This is a trend that’s still in the beginning phases.”

AI in the business

For investors looking to buy ETFs that use AI in their operations, Morningstar’s Mr. Johnson points to Emerge ARK AI and Big Data ETF (EAAI-NEO). Its top holding is Tesla Inc., which accounts for 10 per cent of its portfolio, then Shopify Inc., Twitter Inc. and Square Inc., at about 5 per cent and 6 per cent, respectively.

Tesla may not be the first stock investors think of when they think of AI, Mr. Johnson says, but says the future of the automaker could be making vehicles “that drive themselves by … leveraging artificial intelligence capabilities.”

EAAI is a smaller fund, with about $20-million in AUM and a relatively high MER of 1.32 per cent. Its one-year return is 35 per cent.

For investors looking for more broad exposure to AI and tech stocks, Ms. Khaira singles out the Invesco QQQ Index ETF (hedged to Canadian dollars) (QQC-F-T), which tracks the Nasdaq 100.

“While it’s not a pure AI play by any means, you get heavy exposure to all the major players involved in AI that are household names,” she says, such as Apple Inc, Google parent Alphabet Inc., Microsoft Corp. and Amazon.com Inc. It has $459-million in AUM, an MER of 0.26 per cent and has returned 38 per cent over the past year.

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AI to pick stocks

For exposure to ETFs that use AI for portfolio management, Mr. Johnson points to the Horizons Active AI Global Equity ETF (MIND-T), which invests in major global equity indexes using a basket of mostly North American-listed ETFs. When it was launched in 2017, it was described as the first global equity-focused ETF in the world, to use AI for all security selection decisions.

“Horizons is directly leveraging artificial intelligence to decide when to toggle on and off certain market exposures,” he says. MIND has an MER of 0.98 per cent and a small AUM of $5.5-million. It has returned 17 per cent over the past year.

Another AI stock picker that Ms. Khaira points to is the Vaneck Social Sentiment ETF (BUZZ-A) that tracks the BUZZ NextGen AI US Sentiment Leaders Index, which uses AI to pick stocks with the most “positive insights” on social media platforms. The ETF’s top holdings include Advanced Micro Devices, Apple, Tesla and Nvidia. BUZZ, which started trading in March, has US$226.2-million in AUM, an MER of 0.75 per cent and a three-month return of about 8 per cent.

While ETFs are a really good way of gain diversified exposure to the rapidly advancing area of AI, Mr. Fustey cautions investors that thematic ETFs can be volatile.

“From an investor standpoint, you’re probably looking at a small allocation because these things can really swing around a lot as far as pricing goes.”

He suggests investors make a small allocation to these and other thematic ETFs in their portfolio.

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