Artificial Intelligence (AI) is one of the hottest topics in the investing world today, dominating headlines everywhere. There does not seem to be a week that goes by where I do not meet a stranger who asks me, upon learning my profession, “what do you think about buying Nvidia (or some other AI stock)?” Or during a client review meeting, a client will often ask “how can I take advantage of AI in my investment portfolio?”
The good news for most investors is that it is much easier than they thought to own AI companies in their portfolio. Instead of having to research individual AI companies or evaluate mutual funds or ETFs focused on AI technology there is an easier and better way. Investors who own a well-diversified investment portfolio already have more exposure to AI than they realize as artificial intelligence tools are being utilized by many types of businesses and diverse industries today.
Examining the holdings of the five largest ETFs focused on artificial intelligence we find many names we would expect to see like NVIDIA and Apple. But surprisingly, we also find the names of seemingly low-tech companies with little expected connection to AI like Caterpillar, Thomson Reuters and Honeywell listed among the holdings of these ETFs. This reflects the prevalence of opportunities that AI presents.
Artificial intelligence promises to be one of the most disruptive technologies of the twenty-first century. But like many disruptive technologies from the past, it is difficult to predict which companies will be the dominant players and earn the best investment returns. One only needs to think about long-forgotten names of once dominant companies from the PC world like Gateway, Hewlett-Packard, Burroughs, and Compaq to understand the challenges in trying to pick winners.
Rather than trying to prognosticate which of the hundreds of AI companies will dominate the industry, history shows that broad diversification may be the better approach. Broad diversification helps investors avoid missing out on the eventual AI winners, whenever they reveal themselves. Diversification can also protect investors from significant portfolio losses when investment bets go south.
Sources: Dimensional Fund Advisors LP, Morningstar, The Wall Street Journal, Bloomberg Businessweek