With NVIDIA upcoming earnings announcement, should investors buy direct shares of AI stocks or take a different approach, writes Brett Grant, Head of Product, Marketing & Customer Experience at AUSIEX.
Investors recognise that the AI revolution is a transformative force in today’s economy, promising to reshape a range of industries.
The direct investment options are well known, with big names such as Nvidia dominating the headlines.
However, with several AI stocks exhibiting high volatility and at or near all-time highs coupled with the recent sell-off, advisers face some challenges in terms of how to enter and exit the market as well as how to integrate AI investments into client portfolios.
Should financial planners advise their investor clients to invest directly in US stocks, the NASDAQ index or a tech fund? Or suggest a local AI-focused ETF? Or recommend associated assets that support AI such as data centres, properties that host them or energy providers that power them?
Investors are increasingly considering one of the fastest adoption curves for any new technology with respect to AI. The scalable nature of AI will see adoption move into the steepest part of the s-curve over the coming 12-18 months.
In the meantime, the volatility of AI stocks, such as NVIDIA, Alphabet and those harnessing AI, poses significant risks for unaware investors, especially those in or about to enter retirement.
Consider how at the end of January, Buzzfeed’s (US:BZFD) share price jumped over 200% after it announced it would be using AI to write articles. Those gains were short-lived, disappearing within a week. More recently, Buzzfeed closed its news division and fired 15% of its workforce, Investors Chronicle1 reported a few months later.
Financial advisers and their clients seeking exposure to the AI sector, might consider that there are a range of ways to access and diversify AI-related investments.
Direct investments risk portfolio volatility
Direct investments in AI companies include US-based stocks such as chip manufacturer Nvidia (NASDAQ: NVDA) and Alphabet (NASDAQ: GOOGL), or fellow semiconductor chip maker Qualcomm among others.
While these individual stocks can yield substantial returns they can come with high volatility. For instance, Nvidia’s share price surged by over 120% in 2023 and was up 140% early this year to be, for a moment, the largest company in the world in terms or market capitalisation. But its share price has since retreated. How much higher can it go is uncertain.
ETFs offer diversified exposure
AI exchange traded funds (ETFs) provide broader exposure to a range of AI companies. These include US-based ones such as Global X Robotics & Artificial Intelligence ETF (NASDAQ: BOTZ) and iShares Robotics and Artificial Intelligence ETF (NYSEARCA: IRBO). The first AI ETF in Australia is Global X Artificial Intelligence ETF (ASX: GXAI) but there are also others providing integrated exposure in the form of Betshares Robotics and AI ETF (ASX: RBZ) and Global Xs’ Global Robotics ETF (ASX: ROBO).
Tech sector funds allow access
Broader technology sector funds, such as the Vanguard Information Technology ETF (NYSEARCA: VGT) and the SPDR S&P Kensho Intelligent Structures ETF (NYSEARCA: SIMS), include a mix of AI-focused companies and other tech firms beyond just AI.
Conversely, other sectors and sub-sectors relying heavily on manual processing or with lower levels of automation (such as logistics or healthcare) may also stand to benefit from outsized productivity gains through the application of AI technologies.
It has even been suggested that given some emerging markets have lower levels of legacy technology, that they stand to benefit from a more rapid and pronounced productivity boost from AI implementation.
AI infrastructure
Another way to play the AI theme is to invest in the infrastructure supporting its development, through companies involved in the production of semiconductors, cloud computing and data centres.
Semiconductor chip manufacturers include Taiwan Semiconductor Manufacturing Company (NYSE: TSM) and ASML Holding (NASDAQ: ASML) and Qualcomm.
A less direct approach is investing in Real Estate Investment Trusts (REITs) that focus on data centres that own and manage properties that house the servers and equipment essential for AI operations. Data centre REITs such as Equinix (NASDAQ: EQIX) and Digital Realty (NYSE: DLR) provide facilities for data storage and processing.
Another approach is a mix of these investments. Investing in the AI revolution does not have to mean riding a roller coaster. By diversifying across managed funds, ETFs, infrastructure investments, REITs, international markets, and commodities, financial advisers can offer their clients smarter, more stable ways to benefit from the transformative power of AI.
Advice will obviously vary for each individual investor given their risk tolerance and individual situation – and what different approaches can provide.
Trading strategies for direct investments
Naturally, there will be investors and advisers seeking to obtain more concentrated exposures who are waiting on the sidelines for buying opportunities It may be best to stay out and buy the dip where there are corrections, dollar cost averaging to build positions over time capitalising on volatility events.
Sell timing is also a particular challenge, particularly as the gains in many of the well-known AI plays have been sustained and, in some cases, spectacular. In these situations, trading discipline is essential, with close attention needing to be paid to the price action in times where price-earnings multiples are becoming significantly detached from longer terms averages.
Maintaining trading discipline
Fortunately, modern trading platforms provide a range of features to allow advisers to trade better, regardless of their strategy. These may include using conditional or limit orders to gain precision execution, and trailing stop losses to provide some protection against volatility.
Monitoring the movements of volatility-assets is also made easier using watchlists, screeners, alerts and charting tools.
Another option
AUSIEX notes there is also potentially the option of using protective puts over stocks that are at risk of AI disruption or puts on those expected to rise to amplify gains.