Artificial intelligence - a promising breakthrough for wallets?

The topic of artificial intelligence is undoubtedly the biggest surprise this year on global stock markets; in this article, we have discussed various ways to gain exposure to this new technology, which is perhaps one of the most optimistic expectations about the future since the dawn of the internet.

May 25 share price Nvidia at closing it was 24% higher. In terms of percentage, it was not the largest growth of a listed company in history, but in terms of market capitalization - it was. In just one day of trading, the value of the company increased by USD 185 billion. This growth was driven by exceptionally good revenue and earnings forecasts, well above analysts' consensus estimates.

The company's leadership as a supplier of GPUs has ensured that Nvidia is able to reap maximum returns from increased investment in AI research and deployment. The forecasts for Nvidia confirmed that the excitement about AI is real and have made artificial intelligence more than ever in the spotlight.

What is Artificial Intelligence?

Artificial intelligence is the simulation or generation of an approximate image of human intelligence by machines. It is the ability of the system to correctly interpret external data, learn from that data, and use those lessons to accomplish specific goals or tasks.

AI basically takes two forms: weak and strong. Weak AI is about research and development of applications in limited sub-domains where behaviors that appear but are not truly intelligent are possible. Examples of weak AI include chess computers, chatbots and search engines.

Strong AI deals with research related to creating a computer or software that can reason and solve problems, and potentially have self-awareness. Chat GPT and tools of generative AI are potentially closer to a strong form of AI.

In short, artificial intelligence enables automation and optimization business processes. For example, complex petrochemical companies such as Dow Chemical or DuPont de Nemours can use AI to determine when and where maintenance is needed. Artificial intelligence also comes in the form of high-performance surgical robots that can assist doctors in making the right diagnoses, thereby improving treatment plans.

However, there are many more applications of AI. For example, artificial intelligence can help detect fraud, but it can also recommend music (Spotify) or movies (Netflix) based on the user's previous interests and ratings.

In short, AI has become ubiquitous and is very likely to be an integral part of almost every sector in the future. This means opportunities for investors who would like to take advantage of the growing demand for AI technologies and applications.

Investing in new technology

This sector is expected to record high growth. In the report "Global artificial intelligence market size 2021-2030" published by the research company Statista, it was calculated that this market will grow from USD 100 billion in 2021 to USD 1,8 trillion in 2030, which corresponds to an annual growth rate of 38%. It should be emphasized that this is only one projection, predicting growth rates for a new technology that has never been observed before.

One way to get AI exposure is through the 'Magnificent Seven' - Amazon, Alphabet (Google), Apple, Meta, Microsoft, Nvidia and Tesla. All these companies play a key role in the development and application of artificial intelligence, but it is important to remember that AI is still not a key driver of their profits. Investors should also be aware that investing in single stocks is generally riskier than diversified investing through an investment fund or exchange-traded fund (ETF).

There are two ETFs that are Undertakings for Collective Investment in Transferable Securities (UCITS), monitoring shares of companies related to artificial intelligence and offering adequate diversification and acceptable costs: L&G Artificial Intelligence UCITS ETF and WisdomTree Artificial Intelligence UCITS ETF. Both funds scored at least three out of five globes (points) on the Morningstar Sustainability Rating. However, none of them have yet achieved an overall Morningstar rating.

L&G's AI fund currently includes 68 major and lesser-known positions such as Alphabet (Google), Global Unichip, Nvidia and Shopify, while the WisdomTree fund includes shares in 62 companies. These include Blackberry, C3.AI, Nvidia and Upstart. Ongoing costs are respectively 0,49% (L&G) and 0,40% (WisdomTree) per year. Both funds are traded on numerous exchanges, with euro and dollar denominations available.

The main objective of the L&G fund is to monitor the performance of the ROBO Global® AI Overall Return Index, while the WisdomTree fund tracks the overall AI return index for Nasdaq shareholders. So far both funds are doing the right thing: closely following the benchmark, excluding costs.

The dividend yield ranges from 0,25% to 0,75% per annum for both ETFs and is automatically reinvested in both cases as both funds are accumulative. The underlying dividend yield for these stocks is naturally low as the sector is characterized by very high stock valuations and many companies reinvest their cash flow in growth.

The key risk to consider when investing in AI stocks is, of course, market risk per se, but also increased valuation of shares in this sector, which may be challenged in the event of a further increase in interest rates. Expectations regarding the growth of these companies are very high, which means that the upcoming season of publication of QXNUMX results will be a key test of these expectations.

Most AI-related companies are based in the United States, which comes with significant USD risk. Additional information on the risks, historical returns, costs and currency spreads of the L&G ETF can be found here and for the WisdomTree ETF.

All Saxo Bank forecasts available here.

Hans Oudshoorn, investment strategist, Saxo Bank