How to Start Investing in AI?

Artificial intelligence has gained tremendous popularity over the past couple of years. This was driven by the notable successes of several AI platforms, starting with ChatGPT. Today, even some major conservative investors have begun to consider allocating part of their capital to this area. I’m sure you’re also interested in how to start investing in AI. Well, let’s consider the main nuances.

Reasons for Investing in AI

The topic of AI has attracted investors’ attention for good reason. Here are just a few facts:

• Mentions of artificial intelligence in company teleconferences and negotiations between representatives of various firms doubled in 2023 compared to 2022.
• Employment agency experts believe that using neural networks and machine learning, around 300 million jobs worldwide will be automated in the coming years.
• Economists predict that by 2030, the annual contribution of AI to global GDP will reach $7 trillion.
• Today, the accelerated transition of companies to software with built-in AI functions and the growth in prices of these products could expand the target market of IT companies by $150 billion.

This demonstrates the high potential profitability of investing in AI. Moreover, growth prospects in this direction have significantly increased. It is easy to assess how rapid this process is: just 8-10 years ago, when AI technology was in its infancy, it was only mentioned by a narrow circle of specialists. But after the success of ChatGPT in various fields in just two years, investors moved from a skeptical attitude towards “machine intelligence” to concerns about not being able to invest funds in it in time.

A Beginner’s Guide to Investing in AI

Investing in artificial intelligence can be done in various ways. Each of them has its pros and cons. It is these that you should study first.

Investments in AI Startups

Startups, in most cases, look the most attractive compared to other methods. This is because the investor contributes funds at the initial stages of business formation and development. As a result, potential profitability surpasses any indicators of investments in companies already known in the industry.

Let me give you just one example. OpenAI, the creator of ChatGPT, is still not public and regularly conducts investment rounds. Only from one of its largest investors, Microsoft, it received about $11 billion. By mid-2023, its estimated total capitalization was around $27-29 billion, and by February 2024, it had grown to $80-90 billion. The company today is already competing for the position of the second-most valuable startup after SpaceX. Overall, the management’s plans aim to reach a level of around $2-3 trillion by 2032. Investors who invest money at the current stage can achieve tremendous profitability in 8-10 years.

Of course, not all startups will bring in thousands of percent profit. However, finding promising companies with fresh ideas in the field of AI is not that difficult. It is worth noting that quite a few new projects have started their activities as cryptocurrencies. If you invest in AI crypto, you can expect a faster return on investment and a higher ROI.

However, investments in startups are associated with some problems and risks:

• Direct and venture investments usually require significant amounts.
• Not every retail investor can afford such investments. Statistics show that only about 10% of startups succeed. The rest either fail to implement the initial idea or are created by scammers. This is especially true for cryptocurrency projects. Therefore, such investments are associated with huge risks, often unacceptable for retail investors.

However, there are corresponding funds for such cases. They are managed by professionals who can reasonably choose genuinely promising projects. Therefore, if this investment option is chosen, it is worth considering not direct investments in AI startups, but in funds that deal with them.

Investing in AI Stocks

Buying stocks of AI companies on the stock exchange can be considered an optimal option in terms of balancing risks and returns. At the same time, you can choose the ratio between them yourself.

For example, to limit risks, a good option would be to buy shares of large companies that invest in artificial intelligence. These may include Microsoft, NVIDIA, Alphabet (Google), Baidu, Amazon, etc. It is enough to say that the market capitalization of major beneficiaries of AI technologies today exceeds $10 trillion. This can already be considered, if not a 100% guarantee, then a guarantee that under any market scenario, investor losses will not exceed an acceptable level.

Of course, it is difficult to directly call the purchase of securities by such issuers an investment in AI. The fact is that their interests and business directions are much broader. However, the successes of neural networks, machine learning, and technology in general can contribute to explosive growth in the prices of their shares. However, failures in these areas can lead to rapid declines.

The list of stock issuers also includes smaller firms developing specific AI directions. Examples of such companies may include:

• AI, whose shares grew by 108% in 2022 amid growing interest in artificial intelligence.
• BuzzFeed, whose quotes grew by 120% solely on the announcement that the site’s content would be created using ChatGPT.
• aiHoldings, which develops analytical systems based on AI for military orders, whose securities increased by 514% in a year.

However, speculative stocks carry increased risks. Therefore, it is better for novice investors or retail traders with small capital to refrain from buying them or to purchase these securities in very limited quantities (within 5-7% of the total portfolio value).

The greatest attention when creating an investment strategy should be paid to the stocks of:

• Manufacturers of components for artificial intelligence. There is a clear leader here – NVIDIA (NASDAQ: NVDA), which supplies the lion’s share of processors for neural networks (+$184 billion after the May 2024 publication of a target forecast of 25x revenue growth, resulting in a market capitalization of over $1 trillion). Along with the shares of this company, it is worth buying the securities of TSMC (NYSE: TSM), Micron Technology (NASDAQ: MU), Marvell Technology Group (NASDAQ: MRVL), Intel (NASDAQ: INTC).
• Suppliers of capacities for cloud operations and developers of networking solutions: Alphabet (NASDAQ: GOOG), Microsoft (NASDAQ: MSFT), Amazon Web Services (NASDAQ: AMZN), Cisco Systems (NASDAQ: CSCO), Juniper Networks (NYSE: JNPR), Baidu (9688 or NASDAQ: BIDU).
• Developers of AI-based solutions: Salesforce (NYSE: CRM), Autodesk INC (NASDAQ: ADSK), Adobe Inc. (NASDAQ: ADBE), Intuit Inc (NASDAQ: INTU), C3.ai Inc (NYSE: AI).

When investing in AI through the purchase of securities of companies, there is a serious problem. Typically, they all belong to one or two sectors of the economy, so it is impossible to build a well-diversified portfolio from them. This significantly increases investor risks, making them dependent on the industry/sector’s condition and market situation.

Buying ETFs

A good option for retail investors looking to invest in AI is to purchase ETFs. Among them are those that track stock indices specifically related to artificial intelligence. There are quite a few of such funds that invest not only in AI but also in related areas such as robotics, manufacturing automation, unmanned control of various mechanisms, etc. The list of available ETFs in 2024 is quite extensive. We will provide just a few examples:

• Global X Robotics & Artificial Intelligence ETF, BOTZ.
• ARK Autonomous Technology & Robotics ETF, ARKQ.
• ROBO Global Robotics and Automation Index ETF, ROBO.
• Global X Autonomous & Electric Vehicles ETF, DRIV.
• iShares Robotics and Artificial Intelligence Multisector ETF, IRBO.
• First Trust Nasdaq Artificial Intelligence and Robotics ETF, ROBT.
• Global X Artificial Intelligence & Technology ETF, AIQ.
• Merlyn.AI SectorSurfer Momentum ETF, DUDE.
• Merlyn.AI Bull-Rider Bear-Fighter ETF, WIZ.
• ROBO Global Artificial Intelligence ETF, THNQ.
• QRAFT AI-Enhanced U.S. Large Cap Momentum ETF, AMOM.
• TrueShares Technology, AI & Deep Learning ETF, LRNZ.
• Merlyn.AI Tactical Growth and Income ETF, SNUG.

The fees for most of these funds range from 0.6% to 1.5%, and the entry threshold is relatively low. They share the same drawback as buying a portfolio of stocks — asset diversification leaves much to be desired.

A prime example of using an AI investing app is the first ETF managed by artificial intelligence — AI Powered Equity ETF, AIEQ. It currently outperforms the S&P 500, while its structure does not include speculative or meme stocks.