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Investors Should Approach AI ETFs with Caution, Says Bank of America
Investment strategist Jared Woodard warns against buying Artificial Intelligence (AI) ETFs
Investors who are looking to cash in on the trend of AI stocks should exercise caution, according to Bank of America. Jared Woodard, an investment and ETF strategist, recently initiated coverage of eight AI funds, which have seen an average gain of 27% year to date. Despite their strong momentum, Woodard advises a neutral view on all of the funds due to several factors.
Valuations and Risks
Woodard points out that AI ETFs are currently priced for a bygone world, where bond yields were at 2% and there was easy globalization and friendly inflation. The average AI ETF is trading at 31 times earnings, and one third of AI firms are currently unprofitable. In addition, buyers are acting manic, with 57% of inflows since the Covid pandemic resulting in mark-to-market losses on an 8% monthly drop.
Bank of America's Neutral Rating
While all the AI funds under Bank of America's coverage receive a neutral rating, the firm does give the highest relative score to Global X's Artificial Intelligence & Technology ETF (AIQ), followed by the iShares US Tech Breakthrough Multisector ETF (TECB). It is important for investors to carefully review the holdings of any AI fund they are considering, as some AI indexes are loosely defined. The Global X Robotics & Artificial Intelligence ETF (BOTZ) is highlighted as the closest thing to a "pure play" AI fund, with Nvidia and Intuitive Surgical accounting for over 20% of the ETF.
In conclusion, investors need to be wary of buying AI ETFs in order to chase the trend's big gains. While the current momentum may lead to more short-term gains, there are several risks and overvaluations in the AI market. Bank of America advises a neutral view on all AI funds and encourages investors to thoroughly examine the holdings of any AI fund they are considering.
Hot Take: Impact on New Businesses
The cautious stance advised by Bank of America regarding AI ETFs can have a significant impact on new businesses operating in the AI industry. Here's how:
1. Funding Challenges: With investors being urged to approach AI ETFs with caution, it might become more challenging for new AI companies to secure funding. Investors may become hesitant to invest in AI startups or provide the necessary capital to fuel their growth. This could potentially limit the resources available to new businesses and hinder their ability to innovate and compete.
2. Valuation Realism: The emphasis on overvaluations and risks in the AI market serves as a reminder to new businesses to take a realistic approach to their own valuations. It's imperative for startups in the AI sector to ensure that their valuation is based on sound financials and growth potential. This may require them to demonstrate profitability or a clear path to profitability, as investors become more cautious about unprofitable AI firms.
3. Competitive Landscape: The highlighted ETFs that receive favorable ratings can provide insights into the leading players in the AI industry. New businesses can examine these ETFs' holdings, such as companies like Nvidia and Intuitive Surgical, to gauge the competition they may face. This knowledge can help startups refine their strategies, differentiate themselves, and identify potential partnership opportunities.
In summary, the cautious approach to AI ETFs advised by Bank of America may present challenges and considerations for new businesses in the AI industry. While funding may become more challenging to secure, it also provides an opportunity for startups to focus on realistic valuations and understand the competitive landscape. By navigating these factors effectively, new businesses can position themselves for success in the evolving AI market.
Article First Published at: https://www.cnbc.com/2023/07/11/be-cautious-buying-ai-etfs-bank-of-america-says.html