Artificial intelligence stands at the forefront of technological innovation, promising to redefine our way of life. For Belgian investors seeking to capitalise on this groundbreaking shift, AI ETFs offer a unique opportunity. They not only provide a gateway to the world of AI but do so with the added benefits of ETFs: diversification, lower costs, and the flexibility of trading like a stock. But navigating the myriad of options available can be daunting. That's why we help you make a good decision by picking out the best ETFs that invest in the AI space. However, we also discuss if investing in AI ETFs is actually a smart decision, especially in the light of the poor track record of thematic investing in the past.
Why an AI ETF can be a good investment
The AI industry is at the forefront of technological innovation, with its applications spanning across various sectors such as healthcare, finance, automotive, and more. Think for instance about the growth in ChatGPT's usage in 2023! Investing in an AI ETF provides exposure to this rapidly growing sector, which has the potential for significant returns as AI technologies become increasingly integral to the global economy.
AI ETFs have started to gain popularity as more interest is booming in the industry. AI ETFs typically invest in a range of companies involved in AI technology, from software developers to hardware manufacturers. This diversification reduces the risk associated with investing in individual companies, as the performance of the ETF is not overly dependent on any single company. As AI continues to evolve and find new applications, investors can benefit from the growth of companies that are leading the charge in AI development and implementation.
To illustrate the growth of the AI industry over the recent years, consider the ROBO Global Artificial Intelligence index. This is an index constructed with the goal of providing broad investment exposure to a basket of global AI stocks. Between 2014 and 2023, it has returned a staggering 23.3% per year!
How to select the best AI ETFs
In order to choose the top AI ETFs for you to invest in, there are some criteria we would stick with as a Belgian investor.
Follows an index
The style of investing based on indexes, also called passive investing, is a superior strategy for most people. Active funds, the type of fund offered by most banks, are a lot more expensive and yield lower returns than an ETF that simply tracks an index.
Accumulating fund
Tax-wise, accumulating funds are preferred over distributing funds to avoid paying a 30% tax on dividends. Plus, they're more in line with the passive investor because you don't have to worry about reinvesting the dividends.
Low cost
Most ETFs are already low-cost compared to active funds. But when we have the choice between several ETFs tracking similar indexes, we prefer a cheaper one (all other things being equal). The cost is measured by the total expense ratio, also known as the TER.
Domiciled in Ireland or Luxembourg
Both countries have special tax treaties with many countries around the world. This makes it fiscally advantageous to invest in ETFs domiciled in Ireland or Luxembourg. You can recognise these by their ISIN code that starts with "IE" (Ireland) or "LU" (Luxembourg).
Diversified across many countries
Although most AI companies are based in the US, it's still worthwhile to diversify across AI companies worldwide. It reduces the exposure to risk affecting only the US.
Size matters
Larger funds are less likely to be shut down. A reasonable guideline is to consider only ETFs that have at least €100 million under management. This is especially important as ETFs that focus on a particular sector tend to be more niche and therefore smaller.
Replication
Physical replication is preferred over synthetic replication to reduce third-party risk.
The best AI ETFs for Belgians
We chose only accumulating ETFs to avoid the 30% tax on dividends, and that are physically replicated.
Xtrackers Artificial Intelligence & Big Data (IE00BGV5VN51)
This popular ETF from Xtrackers tracks the Nasdaq Global Artificial Intelligence and Big Data index which consists of companies actively involved in deep learning, image recognition, cloud computing, cybersecurity and big data. It has 84 holdings including companies like Meta, NVIDIA, Alphabet and Apple. 80% of the stocks are based from the US. In essence, it's a slightly less diversified index than the Nasdaq-100. With a cost of 0.35% per year, it is more expensive than most ETFs but the cheapest AI ETF in our list.
Based on historical data of the index, it has delivered an average return of 17.9% per year since early 2019:
WisdomTree Artificial Intelligence (IE00BDVPNG13)
This AI ETF tracks the Nasdaq CTA Artificial Intelligence index. It was launched at the end of 2018 and includes 68 companies.
Compared to the Nasdaq Global Artificial Intelligence and Big Data index, the inclusion criteria for the Nasdaq CTA Artificial Intelligence index are slightly stricter. The Nasdaq CTA Artificial Intelligence index follows companies that work with Artificial Intelligence (AI). These companies are grouped by the Consumer Technology Association into three types: Enabler, Engager, or Enhancer of AI. The index measures how involved these companies are in the AI field using something called the CTA's AI Intensity Rating. This rating looks at how much a company is contributing to AI in its specific group (Enabler, Engager, or Enhancer). Only the companies that score in the top 15 of this rating system get to be part of the index. Additionally, the index checks that the companies meet certain standards related to the environment, society, and how they are managed, known as ESG criteria, before including them.
With a cost of 0.40% per year, it's slightly more expensive than the previous Xtrackers ETF. Based on historical data of the index, it has delivered an average annual return of 19.5% since late 2018:
L&G Artificial Intelligence (IE00BK5BCD43)
This ETF from L&G, created in 2019, tracks the ROBO Global Artificial Intelligence index. It features 62 companies which just under 80% from the United States, and invests in companies around the world that are leading the AI revolution. With a total expense ratio of 0.49%, it is the most expensive in our selection..
Based on historical data of the index, it has delivered an average return of 22.7% per year since 2014:
Which AI ETF to go for?
The cheapest ETF is the Xtrackers Artificial Intelligence & Big Data ETF. However, it also invests in companies in the Big Data space. If you want to keep a focus on just AI, the WisdomTree Artificial Intelligence is a good option.
Why we think an AI ETF may not be a great investment
AI is not the first sector that people have been excited about. Electronics in the 1960s, biotech in the 1980s, internet stocks in the 1990s, and today also water, blockchain, internet security, electric cars, hydrogen... These are just a few examples.
If you're excited about an investment, it's probably not a good investment
The idea behind these eye-catching investment themes is that investors can then participate in potentially disruptive trends or innovations to earn extra returns. Only, if you are excited about an investment, it is probably not a good investment. After all, investors' collective excitement tends to drive up share prices. And few things are as exciting as new technologies or industries.
Remember cannabis stocks? Everyone was going to get rich until they didn't. But unfortunately for cannabis stock investors, it has been a bad trip so far. Between 2014 and 2023, the cannabis industry has yielded a -6.0% average annual return.
The growth of the AI industry may not lead to high investment returns
One of the big challenges with exciting industries is precisely that they are exciting. The excitement about a big new market comes from the fact that companies might make a lot of profit in it, including for investors. But if new and existing companies with profit opportunities around an investment theme then issue a lot of new shares, the investment theme may still end up underperforming the market. Even if there is a huge pile of potential profits up for grabs, based on a new technology, the growth in earnings per share is limited by the dilution of your stock, because there are simply too many new shares added to the market. And in the end, that is what matters to you as an investor: earnings per share growth.
Stocks in trendy sectors are (too) expensive
In addition, hubris causes excessive price increases in trendy sectors. Entrepreneurs who start companies in big markets expect to be successful. And investors who select companies to invest in in big markets expect to pick only winners. That combination can drive up the prices of companies pursuing a popular investment theme. Then, when investors eventually learn more about the market and the level of competition, prices tend to fall, which they often do dramatically.
Thematic ETFs are created too late
As Ben Felix explains, this overoptimism among investors is something that financial product providers like to capitalise on. They usually launch thematic ETFs just after the peak of excitement. Unfortunately, that peak also often corresponds to the peak of returns. From an economic point of view, the ETF issuer's action makes sense. Create an index based on a popular theme that recently produced high returns, build an ETF to track that index and profit along with it. Before, you couldn't invest in them. They are merely concepts that the index manufacturers think will sell. But after the ETF is launched, stock valuations tend to return to earth and appetite for the theme drops. Investors are left with inferior returns.
Picking a sector is an active choice
Finally, by investing in a specific industry like AI, you are making a very active choice. You are no longer buying a broad index that follows the market. Actually, you are buying a very narrow niche of the market and you sacrifice a lot in terms of diversification. And we know that diversification is crucial to reduce risk.
AI ETFs are good business for ETF providers (but maybe not for you)
Unfortunately, the end of thematic ETFs is not in sight. In fact, ETF issuers are doing good business with them. Consequently, they earn a lot higher fees from them than on broadly diversified world ETFs. While you can buy an MSCI World ETF for a 0.12% annual fee, we saw that the cheapest AI ETF costs three times as much. So it's a good thing for ETF issuers to piggyback on these trends. But for investors, thematic ETFs are one of the worst options to invest your money in, in the short term (unless you get lucky) and certainly in the long term.
ARKK is a case study in thematic investing
The ARKK ETF, managed by celebrity investor Cathie Wood and focused on disruptive innovation, is a case study for why thematic investing may not be suitable. First, its heavy concentration in high-growth technology and innovation-driven companies makes it particularly volatile, exposing investors to significant market swings and potential losses, especially in turbulent economic times. Additionally, the ETF's aggressive growth strategy can lead to higher risk, as it often invests in unproven technologies or companies that may not achieve expected success. The fund's performance is also closely tied to the success of a few key holdings, which can be a concern if these companies face challenges. Furthermore, its focus on disruptive sectors might not align with more conservative investment goals or risk tolerance levels. Lastly, the management fees for ARKK, while competitive for actively managed funds, may be higher than those for passively managed index funds, potentially eroding long-term returns for investors.
Curvo, a more diversified alternative than an AI ETF
Fundamentally at Curvo, we believe in diversification across:
- Many different countries around the globe.
- Sectors and industries.
- Company size.
Due to this, the portfolios offered through Curvo should be built to stand the test of time. They should invest only in assets that are widely understood and that, through decades of research and usage, are predicted to earn significant returns over the decades to come. Concretely, this means index funds of stocks and bonds.
We believe that passive investing (also called "index investing") is the best strategy to guarantee long-term success. This follows from our conviction that the financial markets are efficient. Concretely, we think that investments shouldn't be timed based on market sentiment, or worse, feelings and emotions. Active investing, or trying to beat the market by outsmarting other players in the financial markets, is most often not worth the risk nor the additional cost to the investor.
Instead, we believe in a "buy-and-hold" strategy, in total alignment with a long term view. Some may call it unsexy, but we are convinced that good investing is boring. When you invest through a Curvo portfolio, you're investing in 7,500 companies including all the tech companies which will undoubtedly benefit from the growth of AI.
Learn more about how Curvo works.
Summary
We looked at the potential of artificial intelligence ETFs as a promising investment opportunity for Belgians. Artificial intelligence stands at the forefront of technological innovation, promising to redefine our way of life, while investing through an ETF gives you the benefit of diversification compared to individual stocks. We highlighted and compared a few AI ETFs available to Belgians. Yet, we also discussed that thematic ETFs may be a bad investment as most industries that were once trendy tend to underdeliver on their promise for investors.