AI is already changing businesses and, to an extent, the world in unprecedented ways, and there is a high chance that AI may be the next “internet,” i.e., a technology that has changed everything.
On the flip side, overestimating the potential of AI may lead to an “AI bubble,” similar to the dot-com bubble.
It’s important to keep that risk in mind when choosing Canadian AI ETFs for your portfolio.
Factors to Consider Before Investing in AI ETFs in Canada
AI may be a bit overhyped, but in no way is it merely the new buzzword in the market.
It’s becoming an impactful addition to a wide array of businesses, and it also has the potential to create a new generation of dark horses, i.e., new, relatively small businesses that can carve out a significant piece of the market for themselves with the right AI tools.
However, many of the AI ETFs consist of established tech businesses with a heavy AI lean, and few (if any) ETFs, and certainly not Canadian AI ETFs, can be considered pure-breed AI investment by offering you exposure to publicly traded companies exclusively focused on AI.
This leads to at least two less desirable characteristics of AI ETFs in Canada:
- Tech companies not pivoting fast enough or rapidly enough to take full advantage of AI, resulting in a lacklustre performance that influences the performance of the ETF by extension.
- Lack of exposure to unique AI stocks that may experience explosive growth.
Another factor to consider is the current lack of choices in Canada, but it’s just a matter of time. For now, there are three AI ETFs in Canada that you should look into.
- Horizons Robotics And Automation Index ETF (RBOT.TO)
- Horizons Big Data & Hardware Index ETF (HBGD.TO)
- Emerge Ark AI & Big Data ETF (EAAI.NE)
1. Horizons Robotics and Automation Index ETF
- Ticker: RBOT.TO
- Distribution Yield: 0.44%
- Assets Under Management: $44.81 million
- Management Expense Ratio: 0.64%
- Stock Price: $28.49
- YTD Return: 0.72%
Horizon is a well-known name when it comes to Canadian ETFs, and it introduced the first AI ETF in Canada, though it was closed in 2022.
The Horizons Robotics and Automation Index ETF is another Canadian AI ETF that aims to track the performance of the Indxx Global Robotics & Artificial Intelligence Thematic Index.
Following the breakdown of the index’s portfolio, about 50% of the company’s holdings are from the US and around 29% from Japan.
The top holding in the ETF is the AI giant Nvidia, and the top ten include a range of tech companies offering a variety of AI exposure flavours.
The exposure level between AI and automation (even though there is significant overlap between the two) is quite well-balanced, and since they are complementary technologies, the success of one may support the other.
The fund has about $44.81 million in Assets Under Management (AUM) and an MER of 0.64% at the time of writing this.
It pays dividends as well, but the distribution yield is too low to even cover the MER (0.45%). The risk rating of the ETF is high, but the underlying holdings are quite secure, and the majority are giants in tech and other industries.
The long-term performance of the ETF has been lacklustre, but it has a solid portfolio of holdings and is managed by a trusted name when it comes to Canadian ETFs. It’s not a pure-play AI ETF in Canada, but among the limited Canadian AI ETF choices, it’s easily the best pick.
2. Horizons Big Data & Hardware Index ETF
- Ticker: HBGD.TO
- Distribution Yield: 0.76%
- Assets Under Management: $11.6 million
- Management Expense Ratio: 0.59%
- Stock Price: $25.8
- YTD Return: -13.24%
Horizons Big Data & Hardware Index offers you exposure to AI through big data. The companies in this fund are divided into three broad categories – hosting/data center, semiconductors, and blockchain.
The first two serve as infrastructure for big data and, by extension, AI, though blockchain has a relatively tangential relationship with AI.
While not a pure-breed AI ETF in Canada, it has performed well. If you had invested $10,000 in the ETF at the time of inception (June 2018), you would have grown it to over $23,000 by now (Oct 2023).
It tracks the performance of the Solactive Big Data & Hardware Index and has about 50 holdings. The US represents the largest geographic segment, followed by Taiwan and Japan.
While there are AI players like Nvidia in the mix, a significant segment of the portfolio is made up of well-established chip makers with decades of history.
The MER is 0.59%, and the ETF also offers a distribution with a yearly yield of 0.76%.
The performance has been good so far, and even though the blockchain-related investments are a weak point for this fund, they can also give it a powerful boost in the right circumstances.
If you are not concerned about the AI purity of an ETF, this is an option worth considering.
3. Emerge Ark AI & Big Data ETF
- Ticker: EAAI.NE
- Distribution Yield: 0.0%
- Assets Under Management: $5.19 million
- Management Expense Ratio: 1.15%
- Stock Price: $9.06
- YTD Return: 28.25%
Emerge Ark AI and Big Data ETF, as the name suggests, has both AI and Big Data companies in the portfolio. However, there is ample overlap between the two tech segments since data is the lifeblood of most AI models.
The ETF is tiny, with just about $5.5 million in Assets Under Management (AUM). There is just one Canadian company in the top ten companies in the fund, i.e., Shopify.
The holdings are quite diversified, with options spanning from an EV giant like Tesla to gaming companies like Unity Technologies and Roblox. There are a total of 28 companies in the fund.
There are multiple series of funds available, and the MER is (at minimum, 1.15%). The performance of the ETF hasn’t been attractive in the long term, but 2023 has been quite profitable. Between Jan and Aug 2023, the ETF returned about 37% to its investors.
This ETF is a great pick from a diversification perspective as it includes a wide range of AI stocks, and if 2023’s performance is a reflection of what investors can expect from this fund in the coming years, it’s also a great pick from a returns perspective.
But it’s a very small ETF, is managed by a relatively unknown and small management firm, and has a high MER. This increases the risk factor on an already highly speculative investment.
How To Buy Canadian AI ETFs
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Conclusion
If you hope to take the early bird advantage by investing in AI ETFs in Canada, make sure you understand the risks as well.
Even though most AI ETFs are made up of well-established tech companies, there is simply too much uncertainty about how shifting AI trends will impact their performance and the timeline to profitability.
You can also consider waiting until there is more clarity or a wider range of Canadian AI ETFs are available before making an investment.
