The Role of AI in the Stock Market

The year 2023 has been a groundbreaking year for the stock market, with artificial intelligence (AI) playing a critical role in driving returns. One company that has grabbed the spotlight is Nvidia Corp., whose shares have risen an astounding 178% year-to-date when dividends are reinvested. Despite these remarkable gains, analysts working for brokerage firms still believe that now is an opportune time to buy Nvidia stock.

Recently, we examined Nvidia’s valuations and compared returns on invested capital for 60 semiconductor manufacturers. While this stock has become expensive in terms of price-to-earnings and price-to-sales ratios, it has been a model of financial stability for many years.

Today, we’re taking a closer look at the broader AI landscape to evaluate a wide range of stocks. Defining what constitutes an “AI company” can be a matter of debate, and there are different approaches to selecting and weighting stocks in exchange-traded funds (ETFs) that focus on AI. Here are five ETFs that take varied approaches to capturing the exciting potential of AI in the stock market:

ETFs to explore: Robotics and Artificial Intelligence

If you’re an investor looking to gain exposure to the growing field of Robotics and Artificial Intelligence (AI), Exchange-traded funds (ETFs) that focus on this sector may be worth exploring. Here are five ETFs that investors can consider:

Global X Robotics & Artificial Intelligence ETF (BOTZ)

BOTZ currently holds 43 stocks and tracks an index of companies listed on developed markets that are expected to benefit from increased utilization of robotics and AI. BOTZ is weighted by market capitalization, and Nvidia is its largest holding, making up 12% of its portfolio. Established in 2016, BOTZ has $2.4 billion in assets under management.

iShares Robotics and Artificial Intelligence Multisector ETF (IRBO)

IRBO holds 116 stocks that are equal-weighted when the fund is reconstituted annually and rebalanced twice a year. It tracks a global index of companies that derive at least 50% of their revenue from robotics or AI, or have significant exposure to related industries. Established in June 2018, IRBO now has $406 million in assets.

First Trust Nasdaq Artificial Intelligence & Robotics ETF (ROBT)

ROBT has $362 million in assets and holds 107 stocks, with a modified weighting based on how directly the companies are involved in AI or Robotics. It was established in February 2018.

Robo Global Artificial Intelligence ETF (THNQ)

THNQ has $47 million in assets under management and was established in May 2020. Holding 68 stocks, THNQ uses a scoring system to weigh its holdings by the percentage of revenue derived from AI, with holdings also subject to minimum market capitalization and liquidity requirements.

WisdomTree Artificial Intelligence and Innovation Fund (WTAI)

Established in December, WTAI has grown to $105 million in assets under management and holds 77 stocks in an equal-weighted portfolio. According to FactSet, stocks are handpicked, and selected companies “generate at least 50% of their revenue from AI and innovation activities, including those related to software, semiconductors, hardware technology, machine learning and innovative products.”

ETFs Hold 269 Stocks

Five ETFs hold 269 stocks listed around the world. Out of these, 199 companies with market capitalizations of at least $2 billion are covered by at least five analysts working for brokerage firms polled by FactSet.

Top 20 Companies Rated “Buy”

Out of the 199 remaining companies, 79 are held by at least two of the five ETFs. Among these, there are the top 20 remaining companies rated “buy” or the equivalent by at least 80% of the analysts. These companies are sorted by a 12-month upside potential based on consensus price targets.

Alibaba Tops the List

Alibaba Group Holding Ltd. (BABA) tops the list, with a consensus price target 59% higher than the closing price on Monday. However, the stock was downgraded on Tuesday by Bernstein analyst Robin Zhu, who sees a “value trap.”

Stock Prices and Price Targets

Stock prices and price targets are in local currencies where the stocks or American depositary receipts are listed.

Two Stocks Held by All Five ETFs

Nvidia and Cognex Corp. (CGNX) are the only two stocks held by all five ETFs. However, Cognex Corp. didn’t pass the screen because only 21% of analysts rate the shares a “buy” or the equivalent.

Click for More Information

Click on the tickers for more information about each company, ETF, or index. For a detailed guide to the wealth of information available for free on the quote page, click here.

Investing in Stocks Beyond Market Projections

As a novice investor, it can be tempting to rely solely on stock screens and forecasts given by financial analysts. However, it’s essential to note that most stock analysts working for brokerage firms only focus on short-term plans, usually 12-month targets. This limited approach may be inadequate for serious, committed investors, especially when considering a budding industry.

While using stock screens is an excellent starting point for research, it should not be the sole basis. Before investing in any individual stock, it is crucial to conduct personal in-depth research to form a factual and nuanced opinion about the company’s competitiveness. Such research will enable investors to evaluate companies based on their potential growth rate, sustainability of their business model, effectiveness of current management practices, and much more.

The stock screens and reports provided by financial analysts are limited in terms of forecasting future changes in a particular industry. In contrast, a prudent investor takes the necessary steps to remain well-informed and uses analysis tools to project the growth trajectory of certain companies beyond stock market projections.

Don’t miss: Another way to play AI stocks: These companies, including Nvidia, have been the most efficient chip makers

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