According to the way the market has been managed in recent times, every year a new technological innovation emerges that captures the attention and investments of all companies. By 2023, this breakthrough technology is artificial intelligence.
The growth potential that AI has in the long term is enormous; therefore, the most important companies in the world are directing their focus on incorporating tools with this technology. Additionally, the investors’ attention is captured by this type of business.
Growth of AI
Over the past few months, AI’s potential to transform multiple industries has been demonstrated. Investors have been motivated by companies investing in artificial intelligence because, thanks to these tools, the demands increased and such has the ability to generate significant returns for shareholders.
Thus, the Global X Robotics & Artificial Intelligence ETF (BOTZ) reached a 52-week high on the back of a notable increase in its performance. This fund includes companies related to artificial intelligence and tools such as robotics, automation, and cloud technology.
Among the main reasons why the BOTZ ETF is trending upward are the rapid technological development and advancement in recent years of AI and because companies working with this technology have been in a constant process of innovation, making significant advances in fields such as industrial automation, healthcare, autonomous vehicles and more.
However, not everything in the garden is rosy. There are also reasons to evaluate and provide further caution prior to an investment in BOTZ.
No big names
Within the BOTZ ETF, there are none of the most prominent companies in the artificial intelligence space; neither Meta Platforms, Alphabet, nor Taiwan Semiconductor. While it is true that the fund has numerous companies beyond those commonly known to most investors, there is an omission of some important names in the portfolio such as the three previously mentioned, or even Microsoft.
Concentration risk
It is important to note that BOTZ offers little diversification. The ETF is comprised of only 45 positions that focus specifically on artificial intelligence and seeks to take advantage of the best opportunities in that field.
However, the fund’s top ten investments account for approximately 65.7% of its portfolio, implying significant concentration. Moreover, these top positions are even more prominent: Intuitive Surgical, a manufacturer of robotic surgery devices, accounts for 10% of the fund, while Nvidia, the semiconductor giant, has a 9.3% weighting.
This means that BOTZ investors are exposed to significant upside or downside risk, depending on how these companies perform. For example, in the case of Nvidia; since the company bottomed out in October last year, its shares soared and even came close to reaching their all-time high. However, the U.S. company is reportedly overvalued. There are uncertainties about Nvidia’s earnings potential due to the economic slowdown, declining sales of its GPU segment, and other elements. Nvidia may have become a victim of its success, as it generated very high expectations from investors, and although it posted first-half results for the year that beat earnings and revenue forecasts, the market reacted negatively and its shares suffered a decline.
If companies like Nvidia start a negative streak with losses and declines in their shares, the BOTZ ETF could suffer a decline if there is a disappointing earnings performance or other setbacks.
The high valuation of BOTZ
Another reason to thoroughly analyze BOTZ is the overall valuation that the ETF has. Considering that BOTZ’s top two holdings are valued at such high prices, the fund itself also has a considerably high valuation.
It is not news that artificial intelligence is a technology with the potential to transform the economy, which is how it can be argued that the broad universe of AI-related stocks too deserves a valuation above the broader market.
However, despite these lofty valuations, numerous companies involved in artificial intelligence trade at more attractive prices compared to the broader market. For example, tech giants such as Meta Platforms and Alphabet, who have a strong involvement in AI and are trading at 20.4 and 22.2 times earnings respectively, indicating a more reasonable valuation compared to BOTZ.
Even Taiwan Semiconductor, maker of the semiconductors used by Nvidia and other major players in the AI space, presents a more attractive valuation, trading at 16.2 times earnings. This shows that it is possible to find interesting investment opportunities in the AI sector without having to pay an excessive premium compared to the broader market.
The bottom line
The fund hit a 52-week high after gaining 29% year-to-date.
While the BOTZ ETF has experienced remarkable growth and the AI sector has great potential, investors should do their research and consider the risks before making investment decisions. Concentration risk and high valuation should be factors taken into consideration before any decision.
Also, if you are looking for an investment in large companies that work with AI, such as Microsoft or Meta, you may want to look for other alternatives because BOTZ does not have positions in such companies.
Do you think investing in this ETF is a good option? Do you think that artificial intelligence is here to stay or is it just a fad?
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(Information in this post is for general informational purposes only. It cannot and should not be considered as suggestions or recommendations regarding investing or financial decisions.)
