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Posted in  AI  |  March 12, 2024  |  Steven Peterson

What to Expect?

  • Discover The Transformative Potential Of AI

  • Uncover Investment Opportunities In AI Companies For Impressive Returns

  • Explore Diverse Investment Avenues - Individual Stocks, ETFs And Direct Investments

  • Understand The Pros And Cons Of Investing In AI

  • Gain Insights Into Future Prospects Of AI As An Alternative Investment

  • Get Expert Tips On Building A Successful AI Investment Strategy

You've probably heard a lot about AI lately, especially with all the buzz around groundbreaking technologies like generative AI with ChatGPT, Google Gemini, and Microsoft Copilot. But here's something you might not have thought about - AI as an alternative investment.

Believe it or not, AI isn't just transforming industries; it's also creating opportunities for savvy investors to generate some impressive returns over time. Let's dive into just one example to illustrate the AI companies’ potential as an alt-investment.

Back in 2012, NVIDIA was known only for its graphics processing units (GPUs) used in gaming computers. However, some futuristic investors recognized its potential beyond gaming and how its GPU technology was integral to the growing field of artificial intelligence (AI). This led them to invest in NVIDIA.

From being a gaming hardware provider, NVIDIA soon became a leading player in the AI revolution. As demand for AI solutions skyrocketed, so did NVIDIA's stock price.

By 2022, NVIDIA's stock delivered staggering returns to those early investors. Its stock price surged more than 3,000% between 2021 and 2022, outperforming major market indices by a wide margin. The bet on the future of AI technology turned into one of the most lucrative investments of the decade.

Why is AI the New Frontier of Alternative Investment?

The alternative investment category has long been dominated by Venture Capital, Private Equity, Hedge Funds, Real Estate, and Commodities. The reason for their popularity is that these assets offer unique benefits, such as access to early-stage companies, downside protection, and inflation hedging.

However, with rapid technological advancement, Artificial Intelligence has come to the fore. From sci-fi origins, it has become a game-changer in the investment arena.

You may wonder, why the sudden surge of interest in AI? It is because of its unparalleled capacity to process vast amounts of data, identify complex patterns, and make data-driven decisions autonomously. As alternative investments continue to evolve, AI stands at the forefront, poised to revolutionize how we perceive and approach investment.

Finding the Best AI Investments for You

There are various avenues for investing in AI companies. You can invest through individual stocks, ETFs, and direct investments. Here is how it works:

1. Investing in AI Companies’ Individual Stocks

Investing in individual stocks of AI companies offers you an opportunity to capitalize on the growth and potential of specific companies. Here's how to approach investing in AI companies through individual stocks:

a.     Research And Due Diligence

Conduct thorough research to identify AI companies with strong fundamentals. Take NVIDIA Corporation (NASDAQ: NVDA) for example, which is a leading provider of graphics processing units (GPUs) used in AI applications.

Another company to watch out for and invest in is Alphabet Inc. (NASDAQ: GOOGL)  - which is the parent company of Google. It has made significant investments in AI research and development.

b.    Sector Diversification

Diversify your portfolio by investing in AI companies across various sectors, such as Intuitive Surgical Inc. (NASDAQ: ISRG) in Healthcare, or PayPal Holdings Inc. (NASDAQ: PYPL) in Finance. This will help to mitigate your risk and also help you with better returns based on sector and company performance.

c.     Stay Informed

Stay up-to-date with the latest developments in the AI industry, technological advancements, regulatory changes, and market trends. For this, you can monitor company news, earnings reports, and industry publications such as McKinsey Technology, Telecommunications Insights, Forbes Technology, TechCrunch, and Google AI Research Publications. This will help you make informed investment decisions based on data and facts.

d.    Risk Management

Assess the risk-reward profile of every AI company that you want to invest in and allocate capital accordingly. Consider all factors, such as market volatility, competition, and regulatory uncertainty. These will help you determine the appropriate position size for each stock in your portfolio.

2. Direct Investments in AI Ventures

Direct investments in AI ventures unlock the opportunity to support early-stage startups in the emerging AI technology space. It also has the potential to earn you significant returns on your investment. Here’s how you can strategize your direct investments in AI ventures:

a.     Screening

Screen and evaluate AI startups based on factors like technology innovation, market potential, team expertise, and scalability.

b.    Risk Assessment

Recognize the various risks associated with investing in early-stage AI ventures. They include but are not limited to market volatility, technology risk, execution challenges, and funding constraints.

c.     Strategic Partnerships

Consider forming strategic partnerships or syndicates with other investors, venture capital firms, or accelerators. This will help you leverage collective expertise, resources, and networks.

d.    Active Involvement

Actively engage with AI startups in which you've invested. Try to provide strategic guidance, mentorship, and support to help them navigate challenges, accelerate growth, and achieve milestones.

e.     Exit Strategy

Develop a clear exit strategy for all your direct investments in AI ventures.  You can consider options such as Initial Public Offerings (IPOs), Mergers and Acquisitions (M&A), or secondary market transactions. Always try to align your exit timeline with the company's growth trajectory, and market conditions. You should align your investment objectives to maximize returns and liquidity.

3. Investing Through Exchange-Traded Funds (ETFs)

Another avenue for investing in Artificial Intelligence (AI) favored by many is through Exchange-Traded Funds (ETFs). This method offers you a diversified approach to gaining exposure to this transformative technology. Selecting the right ETF can provide you with a convenient and efficient way to capitalize on this growing sector and get great returns.

Here are some of the best ETFs worth considering for AI investment:

a.     ARK Autonomous Technology & Robotics ETF (ARKQ)

This ETF is managed by ARK Invest and invests in companies at the forefront of autonomous technology and robotics. Though this ETF is not solely focused on AI, many of the companies within its portfolio are leaders in the AI field.

Its top holdings include companies involved in autonomous vehicles, industrial automation, and artificial intelligence. ARKQ has a strong track record of identifying innovative companies poised for growth.

b.    Global X Robotics & Artificial Intelligence ETF (BOTZ)

BOTZ invests in companies involved in the development and adoption of both robotics and artificial intelligence technologies. This ETF tracks the Indxx Global Robotics & Artificial Intelligence Thematic Index. This index includes companies across various industries, such as manufacturing, healthcare, and consumer electronics.

As an ETF, BOTZ's portfolio has a mix of established players and up-and-coming companies in the AI space. This can provide you with a balanced approach to investing in AI players at both ends of the spectrum.

c.     iShares Robotics and Artificial Intelligence ETF (IRBO)

IRBO has been launched by iShares, a leading provider of ETFs. It tracks the investment results of the FactSet Robotics and AI Index. This index includes companies across the world that are engaged in the development and application of robotics and AI technologies.

Its portfolio has companies from various sectors such as industry, technology, and healthcare. This can provide you with exposure and a chance to invest in diverse segments of the AI market.

d.    First Trust NASDAQ Artificial Intelligence and Robotics ETF (ROBT)

ROBT tracks the NASDAQ CTA Artificial Intelligence and Robotics Index. This index lists companies engaged in the development and implementation of AI and robotics technologies. The ETF's holdings cover a wide range of industries, including semiconductors, software, and industrial automation.

ROBT's portfolio is primarily inclined towards companies with significant exposure to AI and robotics. This makes it a suitable option for you to invest in companies with cutting-edge and disruptive technologies.

e.     AI Powered Equity ETF (AIEQ)

AIEQ is a unique proposition among AI-focused ETFs as it utilizes artificial intelligence to manage its portfolio. It has been developed by EquBot and employs IBM's Watson AI technology. This helps it to analyze vast amounts of data and identify investment opportunities.

The ETF's AI-driven approach allows it to quickly adapt to changing market conditions and identify emerging trends in the AI space. AIEQ's portfolio consists of U.S. equities across various sectors, with a focus on companies that demonstrate strong growth potential and competitive advantages in AI-related fields.

f.      iShares Exponential Technologies ETF (XT)

XT tracks the performance of the Morningstar Exponential Technologies Index. This index includes companies involved in various cutting-edge technologies, including AI, robotics, blockchain, and nanotechnology.

This ETF is not solely dedicated to AI, though many of the companies it has invested in are leaders in AI development and adoption. XT provides you with a convenient way to invest in multiple technology themes within a single ETF.

g.    Defiance Machine Learning & Quantum Computing ETF (QTUM)

QTUM focuses on companies at the forefront of machine learning and quantum computing technologies. This ETF tracks the BlueStar Quantum Computing and Machine Learning Index. The index lists companies involved in the development and application of machine learning algorithms, quantum computing hardware, and related technologies.

With QTUM you can invest in two of the most transformative technologies of the future, namely machine learning and quantum computing.

h.    ROBO Global Robotics & Automation Index ETF (ROBO)

ROBO tracks the ROBO Global Robotics and Automation Index, which includes companies involved in robotics, automation, and artificial intelligence. This ETF's vast portfolio consists of companies across sectors such as industrial automation, healthcare, and consumer electronics. This makes it a great option for you to invest in companies in the robotics and AI space.

Each of the above-listed ETFs offers you a unique way to gain exposure to AI and related technologies. Are you interested in a broad-based approach to technology investing or are focused on a specific area like machine learning, quantum computing, robotics, or automation? Whatever your interest, you are sure to find an ETF that aligns with your investment objectives.

However, as with any investment decision, it's essential to conduct thorough research before you invest. You need to consider various factors such as the investment strategy, expenses, and historical performance before investing.

4. Opportunities and Challenges of AI as an Investment

Here are the various pros and cons of investing in AI companies:

Pros of Investing in AI

a. Diversification

Investing in AI allows for diversification beyond traditional asset classes such as stocks and bonds. This can potentially reduce your overall portfolio risk.

b. Potential for High Returns

AI companies have the potential for rapid growth and high returns. This is especially true for those companies that are at the forefront of innovation and market disruption.

c. Access to Growth Industries

AI is driving growth across various industries, such as healthcare, finance, and retail. This provides you with exposure to emerging trends and revenue streams.

d. Long-Term Growth Potential

AI continues to evolve and permeate various sectors of the economy. This gives your investment in AI companies the potential for sustained growth and capital appreciation over the long term.

e. Accessible Investment Opportunities

With the proliferation of AI-focused ETFs and investment platforms, you can access various AI investment opportunities, from individual stocks to diversified funds.

f. Portfolio Growth and Diversification

Investing in AI can help you with your portfolio growth and diversification, enhancing your overall returns while mitigating risk. As AI companies are involved in various sectors and industries, you can have access to diverse revenue streams and market opportunities.

When you diversify your investment portfolios with AI-related assets, you can reduce volatility and enhance risk-adjusted returns. You can also benefit from the long-term growth potential of the AI industry.

g. Scalable Revenue Models

AI-driven businesses usually have a scalable revenue model. These are characterized by recurring revenue streams, high margins, and low marginal costs. This kind of scalability enables these AI companies to rapidly expand their operations. They are able to capture market share and drive revenue growth and shareholder value.

As an investor, when you invest capital in AI companies with scalable business models, you can get exponential returns. The reason is that these companies scale their operations and are able to monetize their innovative technologies more effectively.

h. Future-Proof Investments

Investing in AI represents a future-proof investment strategy for you. It can help you capitalize on the transformative impact of AI technologies across industries. AI is nearly certain to play a central role in shaping our future economy, driving innovation, productivity, and economic growth.

By investing in AI companies with robust growth prospects and technological leadership, you can build a solid portfolio that can withstand market volatility and deliver sustainable returns on your investment over the long term.

Pro Tip

When investing in AI, focus on companies with strong leadership, robust intellectual property, and a track record of successful AI implementation. Also, consider diversifying your AI investments across different industries and technologies to mitigate risk and maximize potential returns.

Cons of Investing in AI

1. Volatility

The AI sector can be highly volatile, with stock prices subject to rapid fluctuations. These are usually based on market sentiment, technological advancements, and regulatory developments.

2. Regulatory Risks

Regulatory uncertainty surrounding AI technologies, particularly in areas such as data privacy and algorithmic transparency, can pose challenges and impact the returns on your investment.

3. High Barrier to Entry

Investing in AI requires specialized knowledge and expertise, as well as significant capital investment. This may make it difficult for you to find and invest in AI companies.

4. Market Saturation

There is a proliferation of AI startups and companies competing for market share. This can lead to saturation in certain sectors, increasing competition, and may impact your investment returns.

5. Uncertain Future

The future trajectory of the artificial intelligence industry is uncertain, with factors such as technological breakthroughs, regulatory changes, and economic conditions. This can influence your investment outcome in a big way.

Pro Tip

Conduct thorough due diligence and stay informed about the latest developments in the AI industry. Diversify your portfolio to mitigate volatility and risk, and adapt your investment strategy based on evolving market trends and regulatory landscapes.

5. Future Prospects of AI As An Investment

The prospects of AI as an investment are driven by advancements in technology, evolving market dynamics, and the growing recognition of AI's transformative capabilities across industries.

One of the most important aspects of AI as an investment lies in its pervasive influence across diverse sectors. AI technologies are reshaping traditional business models and driving innovation across all areas, from healthcare and finance to retail and transportation.

As AI startups mature and scale their operations, they present tremendous investment opportunities. There is also the alluring prospect of substantial returns for you when you invest in AI companies.

New avenues for AI investments have come to the fore with the rise of decentralized finance (DeFi) and tokenization platforms. These have led to the creation of decentralized AI marketplaces and also enable you to get fractional ownership of AI-powered assets.

Through tokenization, for example, you can participate in AI-based crowdfunding campaigns, within decentralized ecosystems. This helps you with AI investments with greater inclusivity, liquidity, and transparency.

Conclusion

AI represents a shift in the world of alternative investments and has the potential for great returns. However, investing in AI companies needs careful consideration of risks and possible ROI.

As you explore the realm of AI as an alternative investment, remember to consult with experienced brokers or investment specialists. They can assess your risk tolerance, investment objectives, and suitability to provide you with expert guidance.

Disclaimer: The information provided in this article is for educational purposes only and does not constitute financial advice. Always consult with a qualified financial professional before making investment decisions.

FAQs

Q1: Is there a way to invest in AI?

Yes, there are multiple ways to invest in AI. You can invest in individual stocks of companies that specialize in AI technologies, such as NVIDIA or Alphabet. Alternatively, you can also invest in AI-focused exchange-traded funds (ETFs) or mutual funds.

Q2: How can I invest in AI stock in the US?

Investing in AI stocks in the US is a simple process. Open a brokerage account with a reputable online broker, and purchase shares of publicly traded AI companies through the stock market.

Q3: How do I invest in AI alternative investments?

To invest in AI alternative investments you can explore non-traditional avenues such as venture capital funds, private equity firms, and AI-focused crowdfunding platforms.

Q4: How can I invest in AI?

You can invest in AI through various channels, such as individual stocks, ETFs, mutual funds, venture capital funds, and crowdfunding platforms specializing in AI startups or projects.

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About the Author

Steven Peterson is our staff writer and he has been interested in alternative investing strategies since 2016. He first started his research on gold, and real estate investment trusts which later expanded into wine, hedge funds, and lithium.

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