Going into Thanksgiving week, we are reassured of two things we already knew about artificial intelligence, but that could play a role in portfolio allocation decisions for the new year.
The first is that Nvidia is indeed a beast of a stock. The company continues to deliver impressive results. Even after triple-digit gains this year, and with valuations already trading above 50 times future earnings, Nvidia continues to see massive growth.
This week, Nvidia reported results, beating earnings per share (EPS) and revenue expectations by a wide margin. The last of the “Magnificent Seven” to report third-quarter results didn’t disappoint. Yes, there’s growing concern about forward guidance — many calling for the pace of growth to moderate — but Nvidia still attracted headlines declaring its size, its might, and its stock market “dynasty”-like importance (to quote MarketWatch’s Cody Willard, who likened the company to the Chicago Bull’s Michael Jordan days.)
The second thing is that artificial intelligence remains front and center as an investment theme. It now heads into its third year in the limelight since the arrival of generative AI on the scene.
Thematic Investing With AI
Going into 2025, neither Nvidia nor AI as a broad theme are expected to take a back seat. Quite the contrary.
The latest 2025 Thematic Outlook from iShares singles out AI — and geopolitics — as the two biggest themes for the new calendar year. If you haven’t explored this theme yet, the good news is that there’s plenty of runway to go as AI continues to develop, disrupt and grow.
But to quote Jennifer O’Hara Martin, ETF specialist at T. Rowe Price, “the easy money in AI is over.” As she and her team who manages technology equity portfolios see it, capturing AI as an investment theme is going to call for a focus on much more than Nvidia and Mag Seven stocks. It’s probably going to benefit from a good active manager as the opportunity sets broaden out, or from good benchmarks that are capturing the right opportunity set. Either way, investing in AI is going to call for some additional research as the theme matures.
Phases of AI
In the many conversations we at VettaFi have been having with product providers and market experts in the past few months, we’ve learned that broadening out is a universal view among those in the space. Most agree that AI is a long-term theme, and we are currently barely wrapping up its first act.
iShares, for example, breaks up the phases of the AI theme in a three-tier cycle in its thematic outlook. According to the firm, we are still in the “build phase” — a phase that will remain in place in 2025:
“It is our belief that AI’s continued infrastructure buildout, along with hardware and model upgrades will drive ever more powerful AI tools in the years ahead,” iShares said in its outlook.
“While there has been skepticism around ‘If bigger is better’ when it comes to AI, we are entering the third year of AI’s ‘Build Phase’, which has witnessed a significant surge of investment in AI data centers, with the datacenter GPU and AI ASICS (custom-built chips) markets expected to reach a combined $156 billion by 2025 and $233 billion by 2029.”
Earlier this year, Goldman Sachs explored the many phases of AI, and with a simple chart, it showed that most of the action so far has been in what it calls “Phase 1.” It argued that other phases will bring opportunities in a broader set of companies:
There are many other examples of how asset managers are exploring this investment theme. T. Rowe Price breaks down the AI cycle around what it sees as a hierarchy of “linchpin” technologies — those driving disruptive innovation and implementation in ways that advance the theme.
The so-called chip ecosystem is only the first layer, according to the firm. It’s followed by infrastructure and enablers, foundational models and other applications at the top. At every level, a different set of companies — and often Nvidia — are drivers and beneficiaries of this theme.
XTrackers by DWS tackles AI as an investment theme from a “value chain” perspective, where not only infrastructure but big data, cybersecurity and cloud computing are also integral to the conversation.
ETFs for Artificial Intelligence
These asset managers all seem to agree that AI has a long way to go as an investment theme. They also seem to agree that the opportunity set is going to broaden out and change overtime. And each offers at least one ETF that captures their views.
Let’s look at five ETFs as an example:
- In the lineup of iShares ETFs, there are a few funds that tap into AI and technology, but let’s consider two — both highlighted in the thematic outlook:
The iShares A.I. Innovation and Tech Active ETF (BAI) is an actively managed portfolio of global AI and tech stocks selected through fundamental research. The fund packs a punch as a concentrated play, investing in only 34 holdings. Nvidia, Microsoft and Meta are the top three holdings, commanding about 23% of the total portfolio.
The iShares Future AI & Tech ETF (ARTY) tracks an index that looks to capture the entire value chain of AI, from disruptors and developers to data and services. It, too, has Nvidia at the top, with a 6.5% allocation, followed by Broadcom and AMD. However, its portfolio is a little broader in number of holdings and position weighting, even if 90% of the sector allocation is to technology names.
The fund invests in companies GSAM believes are going to lead future disruption, and that today have under $100 billion in market capitalization. It’s a next-gen approach, if you will.
The fund is actively managed and global in scope. Its top holdings include AppLovin, Marvel Tech, Motorola and Crowdstrike, with more than 77% of the sector allocation tied to the technology sector.
TTEQ isn’t an AI-specific fund, but it’s an actively managed basket of technology stocks that are at the forefront of innovation as well as companies with well-established track records. The portfolio manager bring a boots-on-the-ground approach to global equity research, choosing names that could deliver long-term growth potential. AI is a big theme within the portfolio. Nvidia, Apple, Microsoft and Amazon are among top holdings. The portfolio of 50-plus names also includes the likes of Coinbase, Netflix, Hubspot and DoorDash.
Many Ways to Invest in AI
There are many ways to access AI as an investment theme through an ETF. Consider that there are more than 450 ETFs today that own Nvidia as a top 15 holding. (You can see that list here through our stock exposure tool.)
Asset managers have been quick to offer strategies built around this theme. They have brought their A-game to it, too. Product development has been robust. In the active space, portfolio managers have delivered unique ways to slice and dice this opportunity set. In the passive space, index providers have been innovative too. The list of disruptive tech ETFs today is extensive, and you can get broad or granular in your approach. You can see that list here.
A new year under new government leadership brings a lot of unknowns that we, as investors, need to brace for. But it seems we can count on one thing: Artificial intelligence will stay front and center in the new calendar year as an opportunity for investors looking to capture growth and disruption.
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