2 top ETFs for the artificial intelligence revolution

Image source: Getty Images

Exchange-traded funds (ETFs) are a fantastic way to gain exposure to a wide variety of technology themes through a single investment.

One revolutionary technology that has fascinated investors in 2023 is artificial intelligence (AI). Just two months after being released, ChatGPT, the popular chatbot from OpenAI, reached 100m monthly active users.

This has led some well-informed tech investors to predict that the technology could be bigger than the internet and smartphone.

Here, I’m going to look at two top ETFs that gives investors a chance to invest in AI.

Nasdaq 100

First, I have to go with the Nasdaq 100. The index features 100 of the largest non-financial companies listed on the Nasdaq exchange.

One popular ETF that tracks this cohort of stocks is the iShares NASDAQ 100 UCITS ETF (LSE:CNX1).

Following a 33% plunge last year, this index has been the hands-down winner of 2023. It’s up 37% year to date, driven by its high-calibre collection of AI stocks that includes Nvidia (up 204%), Tesla (up 131%), and Google parent Alphabet (up 47%).

Now, the risk here is that this has left the index looking quite expensive. It’s currently trading on a forward-looking P/E ratio of 26, which is pretty pricey and adds risk.

However, the world-class quality of the stocks that make up this index means it’s rarely cheap. And investors really get the cream of the crop in the AI world with this investment.

For example, Microsoft is the second largest stock with a 9.5% weighting. The tech giant invested $10bn in OpenAI earlier this year for a minimum 49% stake, placing it at the very heart of the AI revolution.

But the Nasdaq 100 also contains smaller firms that are doing interesting things with AI. One is Duolingo, the world’s largest digital language app. Its new learning features are powered by its in-house AI technology combined with ChatGPT.

Duolingo stock is up 133% this year as the firm’s paid subscriber numbers and revenue continue to skyrocket.

If I didn’t already have large exposure to this index, I’d invest in it today to hold for the next decade.

Cybersecurity

Next, I think it’s worth highlighting the L&G Cyber Security UCITS ETF (LSE: ISPY).

Admittedly, this isn’t a pure AI ETF. But most other funds focused solely on the technology are largely invested in those Nasdaq AI giants I’ve already mentioned. So, I’d take a slightly different angle here, opting for cybersecurity.

According to Allied Market Research, the AI market for cybersecurity is estimated to grow from $19.2bn in 2022 to $154.8bn in 2032. So the 40 stocks in this ETF give investors exposure to this potentially explosive growth.

The fund’s top holdings include Crowdstrike and London-listed Darktrace. Both firms have invested significantly in AI.

Crowdstrike’s Falcon platform uses machine learning and AI algorithms to predict, detect, and defend its 23,000 business customers from cyber threats. Its AI systems analyse over 2trn bits of data daily.

One risk with this ETF is that many cybersecurity firms invest heavily to drive further growth. That means many of them run operating losses, which can cause share price volatility when markets enter risk-off mode.

That said, I’m intending to hold this thematic ETF in my portfolio for years, so short-term volatility doesn’t worry me.