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• The AI market is rapidly growing, with AI-focused ETFs gaining popularity among investors.
• The AI industry is expected to change dramatically, with tech giants like Microsoft and Amazon.com leading the AI arms race.
• Despite potential returns, investing in AI-themed ETFs does not guarantee market outperformance.
• The future of AI investments faces challenges such as privacy, data security, and ethical use of AI.

The rapid proliferation of exchange-traded funds (ETFs) focused on artificial intelligence (AI) is a testament to the growing market enthusiasm for AI. Asset managers are offering investors new ways to tap into this enthusiasm, despite the uncertainty surrounding which companies will emerge as the long-term winners from the latest technology revolution. According to data from Morningstar, more than one-third of the two dozen ETFs that include AI in their name were launched in 2024 alone.

In the past week, three more ETFs joined their ranks, including a cloud computing ETF that was rebranded and revamped to specifically target AI. The AI ETF group now has assets of $4.5 billion, drawing it closer to the $5.5 billion nuclear power-themed ETF universe, and pushing it well above the cannabis sector, with $1.37 billion in assets.

The Rapid Growth of the AI Industry

The rapid growth of the AI industry is not surprising. As Daniel Sotiroff, a senior analyst at Morningstar, noted, This is a fast-growing, fast-moving industry, and it is easy to hope that you could end up making a lot of money in a short period of time. The 200%-plus stock gain by chipmaker Nvidia, AI's poster child, over the last 12 months likely just reaffirms that confidence.

Beyond Nvidia, AI is likely to produce a larger and broader swath of beneficiaries in the future. Tony Kim, head of the fundamental equities technology group at BlackRock, is the manager of the two new AI-themed ETFs launched by BlackRock. These funds are actively managed and designed to capture emerging opportunities within AI.

The AI Arms Race

The AI market is expected to change dramatically. As Kim noted, What you think it is today, isn't going to be what it becomes tomorrow or next year or in a few years. This sentiment is echoed by BofA Securities market analysts Ohsung Kwon and Savita Subramanian, who believe there is an AI arms race underway among giant technology companies like Microsoft and Amazon.com.

Venture capital firms are also directing significant funding to AI startups. By the end of the year, it is estimated that as much as $79.2 billion will be directed to AI startups, 27% above 2023 levels. This means that 40 cents of every dollar invested by VC firms will go to an AI company.

However, investing in an AI-themed ETF does not guarantee market outperformance. The largest of the AI funds, the Global X Artificial Intelligence & Technology ETF, is up about 20% so far this year, against a 22% rise for the benchmark S&P 500.

The Future of AI Investments

The long-term goal is to be ready to profit if and when all that capital spending on AI starts to show up in earnings, and be ahead of the curve in identifying new opportunities. As Nathan Miller, vice president of product development at Amplify, said, Like every ETF firm out there, we are trying to offer investors something differentiated.

The rapid growth and investment in AI is not without its challenges. The industry is grappling with issues of privacy, data security, and the ethical use of AI. These challenges are likely to become more pronounced as AI continues to evolve and become more integrated into various sectors of the economy.