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Investing in artificial intelligence (AI): A beginner’s guide

Bankrate logo Bankrate 10/8/2021 Giovanny Moreano
Investing in Artificial Intelligence © Bloomberg/Contributor/Getty Images Investing in Artificial Intelligence

The rapid pace of innovation in artificial intelligence (AI) has brought many experiences to reality that were previously only thought to be fiction. As AI continues to disrupt how we live and work, what are some ways an investor can put their money to work in this type of advanced technology that is quickly reshaping society?

We've put together this handy beginner's guide to help you better understand what AI is, how the technology is used and identify some popular investments in the fast-growing space.

What is AI?

AI attempts to replicate human intelligence in a computer or machine with faster speed and greater accuracy. Companies like Amazon and Google employ the technology to program machines to solve problems, answer questions and conduct tasks previously done by humans.

As systems become more intelligent, AI becomes more powerful, and its uses and applications reach every stock sector and industry. For example, the transportation industry is undergoing a massive transformation around electric and autonomous vehicles, potentially bringing trillions of dollars to the global economy. Similarly, the banking industry leverages AI to improve decision-making in tasks like trading, automate back-office processes like risk management and reduce costs by using humanoid robots in branches. And that’s just the beginning.

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Analysts at International Data Corp. (IDC), a provider of market intelligence, predict that worldwide revenues for the AI market could top $500 billion by 2024, logging a five-year annual compound growth rate of 17.5 percent.

“Artificial intelligence is the most disruptive innovation of our lifetime," says Ritu Jyoti, program vice president, Artificial Intelligence Research at IDC in a recent note to clients. "AI is not just ‘nice to have’ anymore. The global pandemic has accelerated AI adoption, and it is becoming ubiquitous across all business processes.”

How AI is used

Whether it’s law-enforcement agencies using facial recognition software to conduct investigations, AI-powered home appliances like Samsung’s smart refrigerators making our lives easier, or robo-advisors using automated, algorithm-driven models to optimize our investments and make financial-planning recommendations, AI is everywhere.

At AI's core is big data, which data scientists, engineers, and other experts use to build complex algorithms that can take in new information to improve their performance and accuracy. With machine learning, for example, a sub-field of AI, organizations like Facebook employ user data to make content recommendations and predictions. And as users input more data, such as giving an article a thumbs up or thumbs down, the system then stores and processes that information - incrementally becoming smarter.

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According to a survey of more than 350 AI researchers conducted by the University of Oxford and Yale University in 2015, there is a 50 percent chance that machines could outperform humans in all tasks by the year 2060. And some tech visionaries like Tesla CEO Elon Musk believe it could be much sooner.

Organizations increasingly tap into the power of AI to inform critical business decisions, such as prioritizing medical care in an emergency, enhancing recruitment practices, and determining an individual’s eligibility for credit, housing and other essential services.

There’s also a lot of debate on how AI will impact the job market. As humans’ dependence on machines increases, so does the need for employees to improve and learn new skills. The World Economic Forum estimates that by 2022, 42 percent of the core skills within roles will likely change. And by 2030, more than 1 billion people, about one-third of the jobs worldwide, could be impacted by the technology revolution.

To account for the limitations of AI - at least until the technology further evolves - organizational leaders have relied on augmented intelligence, which combines machine intelligence and human expertise. In essence, augmented intelligence empowers humans to work better and faster. The need for humans' input, however, diminishes as AI gets stronger.

Top AI ETFs

For most retail investors, there’s a chance you already have exposure to AI, as many large U.S. public companies are either already using AI or are actively looking to invest in the technology.

But for those looking for broader exposure, exchange-traded funds offer an efficient and easy way to invest in AI-specific stocks.

Similar to other thematic investing types - such as blockchain technology, cybersecurity and genomics - AI ETFs hold a basket of publicly traded companies involved in all phases of AI, from development to implementation.

Outlined here are some of the most widely owned AI ETFs on the market. As you consider these options, make sure to review the fund’s prospectus to understand the investment strategy, holdings and fees.

Note: The data shown are as of Oct. 7, 2021.

Global X Robotics & Artificial Intelligence ETF (BOTZ)

BOTZ invests in companies focused on AI and robotics technologies across sectors in developed world markets.

Fund issuer: Mirae Asset Global Investments

Assets under management: $2.65 billion

Top holdings: Upstart Holdings (UPST), NVIDIA (NVDA) and Intuitive Surgical (ISRG)

Expense ratio: 0.68 percent

ARK Autonomous Technology & Robotics ETF (ARKQ)

ARKQ identifies and invests in domestic and foreign companies that could benefit from emerging technologies and automation.

Fund issuer: ARK Invest

Assets under management: $2.78 billion

Top holdings: Tesla (TSLA), Kratos Defense & Security Solutions (KTOS) and Trimble (TRMB)

Expense ratio: 0.75 percent

ROBO Global Robotics and Automation Index ETF (ROBO)

ROBO invests in a global index of companies driving innovation through robotics, automation and AI.

Fund issuer: Exchange Traded Concepts

Assets under management: $1.78 billion

Top holdings: Brooks Automation (BRKS), iRhythm Technologies (IRTC) and iRobot Corp. (IRBT)

Expense ratio: 0.95 percent

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Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.

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