Investing in the AI ​​theme for the long term. How to choose the winners

Artificial intelligence has shaken up the investment landscape since the groundbreaking launch of ChatGPT in November 2022.

Since then, investors have poured money into all things AI in pursuit of the next big winners. In 2023, a group of major technology players named the Magnificent Seven – Tesla, Amazon, Metaplatforms, Apple, Microsoft, Alphabet And Nvidia – has contributed to much of the market’s rally.

That tailwind continued into 2024, but even the winners eventually reach their limits. Indeed, some of this year’s top flyers came down to earth on Friday, as Big Tech names dragged down the list Nasdaq Composite by more than 2%.

“You have to do your job,” said Jay Woods, chief investment strategist at Freedom Capital Markets. “You want to do the research, you want to know what you’re buying, you want to know what the risks are. In AI, there are a lot of unknowns right now.”

AI is poised to become a central theme as the technology moves from early-stage winners to second-stage adopters. Portfolio and asset managers say investors may want to follow certain strategies if they are looking for long-term strategies.

What to look for

There’s no secret formula for investing and picking AI stocks, but investors can keep an eye on certain metrics and trends when picking the winners from the duds.

Carol Schleif, chief investment officer at BMO Family Office, recommends that when investing in a new sector, investors keep an eye on companies’ cash burn and how they spend their money. Pay attention to the small details, including how a company clears a backlog and how much money it spends on infrastructure.

When it comes to chip stocks, Schleif also recommends looking at government subsidies. The industry won a big win in 2022 when President Joe Biden signed the CHIPS Act into law. The measure allocated money to expand semiconductor production on U.S. soil.

Samsung Electronics is poised to receive funding from CHIPS to make semiconductors in Texas Intel Up to $8.5 billion has been allocated from the measure.

“Focus on the underlying fundamentals, and are they moving in the right direction? [rather] than just the profits of the past quarter,” Schleif advised.

Investors should also avoid blindly chasing the big winners who have benefited from the enthusiasm for AI. For Nancy Tengler, CEO and CIO of Laffer Tengler Investments, that means looking at some of the old economy stocks that are embracing the new digital wave. She likes it Microsoft And IBMa few tech industry veterans.

When building a portfolio, financial advisors and portfolio managers emphasize the importance of diversification – and the same goes for AI.

An exchange-traded fund could be a good way to get that diversified exposure to a basket of stocks that could benefit from the AI ​​theme, rather than sticking to one or two promising names.

Consider diversification through ETFs

Selecting ETFs with dozens of names can be a way to diversify with less risk, says Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.

She emphasized the Global X Robotics and Artificial Intelligence ETF (BOTZ)the First Trust Nasdaq AI and Robotics ETF (ROBT) and the Global X Artificial Intelligence & Technology ETF (AIQ).

“That’s a way to get some exposure without putting the proverbial eggs in that one basket,” says BMO’s Schleif. “You want to be able to focus in a few different ways so you can withstand the volatility.”

Volatility can be a bitter pill, especially for newer investors. Stocks tend to initially rise when a new theme hits the mainstream, but often suffer from volatility and pullbacks at some point, says Helen Dietz, CFP and managing director at Aspiriant.

“The newer the trend, the more volatile the trend,” she said. “The corrections of those individual stocks, or those sectors, can sometimes be quite violent, which is not unusual, and that scares the investing public.”

To that end, Nvidia shares suffered a setback on Friday as they plunged 10%, posting their worst day since March 2020. The decline put a significant dent in the chip stock’s gains this year, but it remains up nearly 54% for the year. 2024. Peer AI Game Super microcomputer also took a nosedive that day, down 23%.

ETFs typically contain a range of names and can vary in weighting. Although the BOTZ ETF and the Roundhill Genative AI and Technology ETF (CHAT) are both currently lagging behind some of this year’s popular AI winners. However, the underlying names are varied: BOTZ holds Nvidia and robotics in its grasp Intuitive surgerywhile CHAT’s top positions are Microsoft, Meta and Service now.

Schleif recommends looking for ETFs that have high trading volume and are backed by reputable companies. Investors should also consider fees, which can take a bite out of returns if they’re too high.

While gains may lag the surge in stocks like Nvidia and Meta, ETFs allow investors to gain exposure to the sector with lower risk, Woods said. Longer term, investors can also use the leadership in these funds to consider picking individual names further down the line.

“The old cliché is timing the market and then hoping you find that individual stock that can really deliver the big performance,” Woods said. “If you want to be involved, you want to be diversified and I think an ETF is the best way to do that.”