Preface: ⏰
In 2024, when talking about the investment areas with the most unlimited potential, most people will think of "artificial intelligence".
Since its announcement, we have seen various AI-generated videos and short films spread rapidly on the Internet. Although how AI can improve productivity and bring revenue to related companies remains a big question, those companies that have invested in AI have made a lot of money.
In particular, Nvidia has become a leader in the GPU market needed for generative artificial intelligence, with a market value of more than $2 trillion, ranking third in the world, after Apple and Microsoft. The legendary story of the company's founder, Huang Renxun, has also become the focus of major media reports.
🔴Main text begins: How to get a share of the technological revolution?
The most direct way is of course to buy Nvidia's stock a few years ago. But the reality is that we can't go back in time and catch those stocks that will rise sharply in the future. Especially in the field of artificial intelligence, there are thousands of related companies. Few people would have thought of betting on the artificial intelligence track by investing in Nvidia a few years ago, and it might even be considered a fantasy.
Another option for many individual investors is to buy ETFs that specialize in investing in the AI theme. These ETFs will not invest in just one or two companies, but will select dozens or even more company stocks. This investment method can ensure that your portfolio covers as many different companies as possible, thereby minimizing the probability of missing out on a particular company.
Of course, there are many thematic ETFs that focus on artificial intelligence. This is because the concept of artificial intelligence is very broad. In the past two years, artificial intelligence has become one of the hottest investment themes, and many companies have chosen to get involved in the field of artificial intelligence and add "artificial intelligence" to their products, services or publicity. According to a report released by British venture capital firm MMC, in 2019, there were 2,830 start-ups in Europe that claimed to be doing artificial intelligence, but in fact only 1,580 were actually conducting artificial intelligence research and development. In other words, about 45% of companies that claim to be artificial intelligence are just chasing the heat in the name of "artificial intelligence", and are not actually engaged in related research and development.
In addition, if we dig deeper into the concept of artificial intelligence, we will find that it covers a very wide range and can be further subdivided into industrial automation, non-industrial automation, 3D printing, language generation, autonomous driving and other fields. It is no exaggeration to say that all these sub-industries are closely related to artificial intelligence, and the companies in them can be classified as artificial intelligence themes.
🔴Analysis:
As of April 2024, we have about 50 AI ETFs to choose from. If we only consider ETFs with a fund size of more than $150 million, the number can be reduced to about 18. These ETFs have different investment strategies and focuses, but all of them are based on AI as the core theme, aiming to help investors share the investment returns brought by the technological revolution led by AI.
Over the past year, only four of the 18 AI ETFs have outperformed the S&P 500 over the same period. Some ETFs have performed quite badly. For example, the First Trust Nasdaq Artificial Intelligence and Robotics ETF (ROBT) lagged the S&P 500 by 19% over the same period. The WisdomTree U.S. AI Enhanced Value Fund (AIVL) lagged by 13%.
Investors may be surprised. Why are the returns from investing in the hottest artificial intelligence industry not as good as the average return of the stock market? This is mainly because the performance of artificial intelligence stocks varies greatly. Nvidia and AMD are the big winners. In addition, large-cap companies such as Amazon, Microsoft and Metaverse have also seen their stock prices soar due to the concept of artificial intelligence.
Ultimately, whether investors can get a good return depends on whether their portfolios include stocks like Nvidia, Amazon, and Microsoft, and what proportion of them these stocks account for.
As of April 2024, the weights of Nvidia, Amazon, Microsoft, and Metaverse in the S&P 500 index are 5.3%, 3.72%, 7.25%, and 2.55%, respectively. The S&P 500 index has returned about 30% in the past 12 months, of which about one-third came from the contributions of the above-mentioned technology giants.
However, ETFs that specialize in investing in the AI track do not put most of their weight on top technology companies like the S&P 500 index does. This is because these ETFs aim to cover the entire track rather than specific companies. Therefore, these ETFs will limit the maximum weight of a single stock to 4% or 5%. When the weight of a particular stock exceeds this ratio, the ETF fund manager will rebalance to ensure that the weight distribution of the portfolio is balanced.
🔴Conclusion:
First of all, investing is not as simple as you think, especially choosing industries and tracks. Even if you choose a popular direction such as artificial intelligence and buy related funds, you may not necessarily make more money than the market average, and may even make less than the market. Therefore, we need to keep a portion of our investment portfolio for passive investment, because passive investment usually performs about the same as the market.
Secondly, the threshold for active investment is very high. Some people see that artificial intelligence is a "trend" and want to follow the trend and invest. But if you just buy some artificial intelligence ETFs, it will be too difficult to earn returns that exceed the market. Smart investors should understand that if you want to make more money, you must spend more time and effort.
Furthermore, real active investment does not need to be too diversified. As investment tycoon Buffett said, there is no need to diversify investments too much. Generally, buying 8-10 stocks is enough. Because everyone's energy and knowledge are limited, it is impossible to know everything, so investors should study in-depth in the areas they are good at. Remember, the purpose of active investment is to exceed the market average, not simply to pursue diversification. Of course, the premise is that investors must have a deep understanding of the market.
Finally, a more practical approach in reality may be to hold both active and passive investment portfolios. You can use part of your funds to buy low-cost index funds and hold them for a long time, and use the other part for active investment to pursue industries or companies that you are optimistic about. This will not only ensure that you get the average return of the market, but also have the opportunity to try to beat the market and make more money.