The world of exchange-traded funds (ETFs) tied to the artificial intelligence (AI) boom has seen significant growth and potential in the first half of 2023. However, as investors carefully consider the impact of higher interest rates, the momentum behind these ETFs is starting to shift. While there is no denying the power of AI in transforming industries, the tech-fueled hype is now being balanced by a renewed focus on other sectors that can enhance efficiency.
Global X, a major player in the ETF space, operates two AI funds, including the Robotics and Artificial Intelligence ETF (BOTZ). While Nvidia takes the spotlight as the largest holding in BOTZ, the fund also includes industrial robotics and automation companies like Intuitive Surgical, Keyence, and Dynatrace. These industrial players offer invaluable solutions to enhance efficiency, making them an essential component to focus on. The idea that AI is not solely about artificial intelligence itself, but also about the potential for other sectors to benefit from these advancements, is gaining traction among investors.
The Rise of Industrials
Contrary to popular belief, AI is not just a tech play. Todd Sohn, ETF and technical strategist at Strategas Securities, believes that industrials have been an under-the-radar success story over the past 10 months. This sector has shown significant growth, with the Industrial Select Sector SPDR Fund (XLI) experiencing an almost 8% increase this year. Additionally, it has attracted over $903 million in inflows. In comparison, broad thematic tech ETFs have faced outflows, with the iShares U.S. Technology ETF (IYW) losing over $551 million and the Technology Select Sector SPDR Fund (XLK) recording outflows of nearly $2.06 billion.
The behavior of investors does not always align with market trends. Despite the tech-heavy Nasdaq 100 experiencing a 40% increase this year, there is a lack of enthusiasm compared to previous years. Some investors, concerned about higher interest rates and inflation, are now turning their attention to stricter exposure plays like AI. The allure of the broader tech rally experienced in recent years seems to be subduing.
AI and Tech Integration
While the focus is shifting to sectors beyond tech, it is important to note that tech still plays a significant role in AI ETFs. Global X’s more mainstream Artificial Intelligence & Technology ETF (AIQ) features tech holdings, albeit with no more than 3% exposure to the largest mega-cap tech companies. These companies, such as Amazon, Alphabet, and Meta Platforms, are crucial in the AI space due to their access to vast quantities of data. Data currently drives the AI landscape, with ongoing efforts to determine its future trajectory.
For investors seeking diversification beyond the tech wave, the industrial sector presents a promising opportunity. The rise of AI-induced efficiency and productivity in robotics and automation companies positions industrials for growth. With Industrials comprising approximately 9% of the S&P 500, it is relatively easier to overweight this sector compared to the information technology sector, which accounts for 28% of the index. Those looking to align their investment strategy with the industrial sector can utilize ETFs to capitalize on this potential.
As the landscape of AI ETFs evolves, investors are seeking a careful balance between the hype surrounding tech and the impact of higher interest rates. The inclusion of industrial robotics and automation companies in AI funds adds another dimension to the potential investment opportunities. While the broader tech sector has experienced outflows, investors are recognizing the value of Industrials in driving AI-induced efficiency. By considering sectors beyond traditional tech plays, investors can diversify their portfolios and position themselves to benefit from the rise of AI in the years to come.
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