Key Takeaways
- ETFs focusing on emerging technologies like AI, blockchain, and robotics charge higher fees due to specialized management needs.
- Investors should review the holdings of thematic ETFs regularly to ensure they align with evolving investment strategies.
- While these ETFs offer high growth potential, they come with volatility and should be balanced with conservative investments in a portfolio.
- Thematic ETFs are generally more tax-efficient than mutual funds, but individual tax obligations may vary.
- ETFs in these sectors face foreign exchange risks due to their global reach, impacting overall performance.
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Some of the most popular new investments focus on advanced technology such as artificial intelligence (AI), blockchain, and robotics.
In the fast-evolving tech sectors, AI, blockchain, and robotics are on the shortlist of those most likely to be widely transformative this decade. Blockchain has been called by some a breakthrough technology as important as the internet. Robotics offer the potential for greater efficiencies that come with increased automation, while artificial intelligence occupies a similar space.
Enter thematic ETFs, which are investments that target these sectors.
Exploring Long-Term Opportunities with Thematic ETFs
Why are ETFs focused on AI, blockchain, and robotics drawing so much interest from investors, given their narrow focus and they often have higher fees than traditional ETFs?
For starters, there’s the novelty. AI, blockchain, and robotics are still relatively new and create far more headlines than most other sectors. Many investors are also simply optimistic about these new industries and want the kind of profits seen by previous generations from their participation in the rise of computing, the internet, and social media.
Important
Investing in emerging technology ETFs for robotics, AI, and blockchain offers high-growth potential and risks. These fields can be volatile and should fit your broader investment strategies.
Investors are generally bullish on new technologies because AI, blockchain, and robotics are expected to grow significantly well into the future.
Here are ways investing in these ETFs—a type of exchange-traded product (ETP)—could have long-term potential:
- Capitalizing on macro trends: Thematic ETFs are frequently built around longer economic or sociopolitical trends. The shifts expected by AI, blockchain, and robotics could affect many industries and sectors. It could also change the way we live our daily lives. By investing in companies that stand to benefit from these vast shifts, these ETFs aim for long-term growth, not just short-term gains.
- Early access to emerging industries: Investors, in general, hate to lose out on assets that later turn out to be highly lucrative. No one wants to be the one who could have been an early investor in IBM, Apple, or Google but wasn’t. By gaining exposure to these sectors through ETFs, investors can gain exposure to their long-term growth trajectory.
- Niche yet diversified: While sector-focused funds target an industry, thematic ETFs in AI, blockchain, and robotics often include shares from a broader range of firms across the economy. This diversification within a niche can mitigate the risks of putting all your chips in one industry.
- Lower volatility: This diversification may distribute the risks, making these ETFs more resilient to industry-specific problems.
- Accessibility and professional management: These ETFs are traded on stock exchanges, making them accessible to individual investors without requiring significant capital outlay. They have greater liquidity, so you can get in or out of your positions relatively quickly if trends begin to change. In addition, the typical knowledge you would want before undertaking investments in AI, blockchain, and robotics is not as high as if you were picking the shares yourself. These ETFs are typically managed by experts who have deeper insights into the companies they select for the funds.
Examples of Thematic ETFs
By investing in AI, blockchain, and robotics-focused ETFs, you are not just expecting good performance from companies producing these technologies. You are also making a wager on your expectation that AI, blockchain, or robotics will be widely adopted across the economy. Here are the ETFs making a similar wager:
- Global X Robotics & Artificial Intelligence ETF (BOTZ) invests in companies positioned to benefit from the increased adoption of robotics and AI. BOTZ’s portfolio includes stocks from the healthcare sector, where robotics are used for surgeries and diagnostics to auto industry companies, placing AI in self-driving cars. As of October 2023, its top five holdings were Nvidia, Intuitive Surgical Industries, Keyence Corp., ABB Ltd., and Fanuc, representing various industries.
- ROBO Global Robotics & Automation Index ETF (ROBO) delivers exposure to robotics, automation, and AI across a broad set of companies and sub-industries.
- iShares Exponential Technologies ETF (XT) aims to profit from the performance of companies whose technology could substantially change the business landscape. Information technology stocks comprise about half of its portfolio, followed by healthcare.
- Amplify Transformational Data Sharing ETF (BLOK) exposes investors to blockchain technology firms, focusing on those developing or deploying blockchain solutions for data sharing and security.
- Siren Nasdaq NexGen Economy ETF (BLCN) tracks the Siren Nasdaq Blockchain Economy Index, investing in companies developing, researching, supporting, or using blockchain.
- Capital Link NextGen Protocol ETF (KOIN) uses AI and blockchain to invest in firms that stand to benefit from blockchain technology’s adoption in sectors from finance to supply chain management.
While none of these technologies has yet truly transformed the business world (or the world at large), these thematic ETFs offer a basket of assets with both exposure and diversification within these fields, each of which has a compelling case that could make it part of long-term trends in the economy.
Fast Fact
A blockchain ETF invests in the shares of companies with business exposure to blockchain technology, such as software companies. This is different from crypto ETFs, which invest in digital currencies.
The Importance of Vigilance for Long-Term Investors
Long-term investors in ETFs (whatever their focus) should ensure they keep up to date with their ETFs’ investments. If your ETF is overexposed in one sector or trends are changing, you could balance your risk with other assets. Just because an ETF may be passively managed does not necessarily mean you should treat your investment passively.
This advice applies to index ETFs just as much as it does ETFs representing new areas such as AI, blockchain, and robotics. Indeed, because these fields constantly evolve, you perhaps need to be even more vigilant.
Can ETFs Focused on AI, Blockchain, and Robotics Be Part of a Retirement Portfolio?
These types of ETFs would add diversification and the potential for growth over the long term to your retirement portfolio. Nevertheless, these ETFs are focused on emerging technology markets that can be volatile, perhaps requiring them to be balanced against more conservative, long-term investments. Consider your risk tolerance and time horizon before adding assets to your retirement portfolio.
How Tax-Efficient Are ETFs for AI, Blockchain, and Robotics?
Like other ETFs, thematic ETFs are generally more tax-efficient than mutual funds because they have a creation-redemption mechanism that allows investors to reduce their capital gains taxes. However, your tax obligations vary depending on the ETF’s specific trading activities, the underlying assets, and your own portfolio. It’s always prudent to consult a tax professional for advice tailored to your situation.
How Do Foreign Exchange Risks Affect ETFs Focused on AI, Blockchain, and Robotics?
Since these fields all have global reach, ETFs invested in them are exposed to currency risks. Fluctuations in exchange rates affect the value of these international holdings and, consequently, the ETF’s overall performance. You should be aware of this risk and consider hedging strategies if an ETF you’ve invested in is significantly exposed on this front.
How Do Thematic ETFs Stay Current Given the Rapid Changes in Technology?
ETFs like those above often have mechanisms to ensure their portfolios stay up to date, even in fast-moving tech fields. They also might use active management or rebalancing to adjust their holdings to respond to recent developments, newer technologies coming on board, or changes in the market.
The Bottom Line
New technologies are famously disruptive to the status quo, and thematic ETFs focused on AI, blockchain, and robotics can expose you to fields expected to offer long-term growth and disruption to many industries. ETFs that target their exposure to companies driving or profiting from advances in AI, blockchain, or robotics have shares in firms that cross sectors from healthcare and automotive to consumer goods.
While they offer the potential for high returns, it’s important to use caution and consider their fit within your broader portfolio, given the risks. Whether you’re a seasoned investor or new and looking not to miss out on investing in this generation’s major changes, thematic ETFs offer the ability to diversify within these niches.
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