The stock market has integrated volatility as shareholders are participants in both the profits and losses of a company that can move stock prices. Thusly, anything that affects the bottom line of a company’s financials creates volatility. Uncertainty also breeds volatility. And when we talk about a new technology like artificial intelligence (AI), whose potential is not yet known, volatility is high. Can risk-averse investors scared of volatility invest in something as uncertain as AI? Yes, they can.
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Volatility in AI
To control volatility, you should know what is causing it. AI technology gives a computer the power to think and make decisions like a human. So far, generative AI creates content, videos, and presentations like a human, based on the data it is trained on. AI applications are being tested to analyze images and find anomalies, drive cars, and do a lot more. While these may look like an opportunity to hop on, there are risks.
There is uncertainty around the potential of AI and how secure it is. The laws around AI are still vague. With the speed at which AI is developing, it is easy for a small company to overtake a large company in technological advancements. Any new technology takes time to perfect itself. There is also the risk of AI incidents that could stall the development of AI applications.
For instance, Telus International declared that it will not use AI to create or replicate the art of Indigenous people after such replication sparked controversies in Australia. Back in 2018, Nvidia suspended its self-driving car tests after a crash during the testing. Such incidents could spark volatility in the share price of the companies using AI.
How to invest in AI while reducing volatility
Investing in individual stocks is riskier as they bring company-specific risk along with broader market risk. A smart way to reduce volatility is through diversification. Instead of investing in individual stocks, you can consider investing in an AI-themed ETF.
AI hardware and application ETF
The Global X Artificial Intelligence & Technology ETF (NASDAQ:AIQ) invests in AI hardware companies and companies using AI in their product and service offerings. Some of its top holdings are tech giants like Cisco and Adobe, which have the resources to experiment with AI.
The objective of the ETF is to benefit from the high growth potential of generative AI and its commercialization in various verticals such as information technology, communication services, and consumer discretionary. Being a thematic ETF, it has a high management fee of 0.68%.
While the AIQ ETF gives you exposure to the AI boom, the big companies have other growth drivers and are already enjoying the widespread adoption of their offerings.
Industrial AI ETF
The Global X Robotics & AI Index ETF (TSX:RBOT) RBOT invests in equity securities of companies that are involved in the development of robotics and/or AI. It diversifies your portfolio across multiple sectors like information technology, industrial services, and healthcare. It also invests in companies in different countries like the United States, Japan, and Singapore. Some of its notable holdings include Nvidia and Japanese company Omron, which supplies electrical components and equipment for industrial robots, healthcare, surveillance systems and more.
The ETF has a management expense ratio of 0.64%. A professional fund manager monitors the developments in the AI and robotics space and keeps changing the holdings. You will be assured that you are picking up on the right trends while mitigating volatility.
Technology ETF
The iShares S&P/TSX Capped Information Technology Index ETF (TSX:XIT) does not focus on AI but has holdings in Canada’s technology companies leveraging AI potential. For instance, some of its holdings, like Shopify and OpenText, use AI tools and solutions to enhance their offerings. Shopify is using AI to help merchants write product descriptions and chat with customers. OpenText’s Aviator helps companies train AI on their private data in a secure environment and use it to manage content. The XIT can help you tap the broader adoption of AI in the technology sector.
