Ever since OpenAI introduced the world to ChatGPT, we’ve seen AI capabilities expand to include image generation (remember the six-fingered hand memes), with Dall-E and photorealistic video with SORA. However, AI’s impact now stretches across various sectors including semiconductors, big data analytics, social media, consumer electronics and cloud computing.

Unsurprisingly, big tech companies (like Meta Platforms with Meta AI, Apple with Apple Intelligence for its devices, and Microsoft with its $13-billion investment in OpenAI) are racing to dominate this space. Even Amazon stepped in as a key player, utilizing its Amazon Web Services (AWS) platform to bolster the infrastructure needed for these technologies.

So, what does that mean for the rest of us? For Canadian investors looking for AI exposure in their portfolio, navigating through company-specific risks is crucial. To put it bluntly, stock-picking is hard, and it is exceedingly difficult to predict the winning AI stocks of tomorrow given the combination of intense competition and an evolving regulatory environment.

That’s where AI ETFs and I come in. I’m here to guide you through the thematic ETF options available for Canadian investors interested in AI, providing an objective overview of their pros and cons, the options available to you, and my personal thoughts.

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Understanding AI and thematic ETFs

AI is broadly defined by Merriam-Webster as “the capability of computer systems or algorithms to imitate intelligent human (sic) behavior.” For investors, understanding AI requires considering how these companies are categorized within the industry.

I like the Nasdaq CTA Artificial Intelligence and Robotics Index, which unfortunately is not tracked by any Canadian-listed ETFs. It nonetheless provides a useful framework by sorting AI companies into three types depending on the degree and nature of their involvement:

• Enablers: These companies are the backbone of AI and robotics. They create the technologies that all AI applications are built on. For example, Nvidia is a leader here because of its development of GPUs that are crucial for running complex AI algorithms.
  
• Engagers: These are the companies that develop and implement AI directly into products and systems. Microsoft is a great example as it integrates AI across its range of software products to enhance user productivity and business processes.
  
• Enhancers: These companies use AI to add value to their existing offerings. Intuitive Surgical, known for its da Vinci robotic surgical systems, enhances the precision and effectiveness of surgeries with AI.

We call AI ETFs “thematic” because they follow a particular trend or industry outside of the broader market. They focus on a specific Global Industry Classification System (GICS) sector, for example technology, or industry group, such as semiconductors.

For example, an AI thematic ETF may hold shares of Microsoft, Meta and Amazon, each of which actually hail from different sectors—technology, communications and consumer discretionary, respectively—but are now grouped together due to their AI involvement. 

In essence, when you gather a collection of AI-focused companies like those above based on certain rules or an index, place them into a basket and then offer shares of said basket on an exchange, you get an AI-themed ETF. 

Pros and cons of AI ETFs for Canadian investors

As with any investment security, AI ETFs come with their own set of advantages and disadvantages. It’s important to understand these to determine how well they align with your investment objectives, risk tolerance and time horizon. Here’s what I think is important to know:

Buying AI ETFs in Canada

The AI ETF market in Canada has seen significant growth recently, particularly in 2024 with a variety of new ETFs making their debut. 

These ETFs include both actively managed funds, where issuers select stocks based on their research or proprietary strategies and passively managed funds, which replicate and track a benchmark index.

The AI ETFs trading in Canada

Below, I’ve provided a table offering an overview of what i consider to be the five major Canadian thematic AI ETFs available right now:

Let’s start with CIAI, which launched on May 2, 2024. This ETF has quickly grown to $512 million in assets under management, as of June 19. 

Despite the use of active management, the management fee is refreshingly low at 0.2%. That number is competitive with some asset allocation ETFs, although the exact management expense ratio (MER) is yet to be determined due to the fund’s newness. A look at the portfolio from July 10, shows top holdings including Nvidia, Meta, Microsoft, Alphabet (Google) and Apple.

Another notable entrant is ARTI, which is also actively managed but leverages Boosted.ai. That’s an AI-powered portfolio management software for stock selection and weighting. The fund has similar top holdings as CIAI, pointing to the fairly shallow depth in the AI theme. ARTI is also three times more expensive with a 0.6% management fee and has struggled to attract significant inflows, with just under $5 million in assets under management.

Not just domestic fund managers like Evolve and CI are entering the Canadian AI ETF scene. Invesco Canada offers INAI, which tracks a namesake index for a 0.35% management fee. The index is actively managed by the “Morningstar Equity Research Next Generation Artificial Intelligence Committee” which reviews and assigns exposure scores for holdings, making it less passive than some might expect. 

The index focuses on four sub-themes (generative AI, data and infrastructure, software and services) and includes notable foreign holdings like Taiwan Semiconductor Manufacturing. INAI is not currency hedged but does offer a Canadian dollar-hedged version, INAI.F.

Finally, Global X ETFs (formerly Horizons) actually offers not one, but two AI thematic ETFs: AIGO and RBOT. 

AIGO, which made its debut on May 14, 2024, tracks the Indxx Artificial Intelligence & Big Data Index by wrapping a U.S. Global X listed AI ETF in a fund of funds structure. It charges a 0.49% management fee and is not currency hedged. AIGO’s underlying U.S. ETF currently holds companies like Nvidia, Qualcomm, Broadcom, Netflix, Meta and Tencent, showcasing a broader semiconductor and communications focus.

RBOT, by contrast, has been around much longer, having listed in 2017, and has accumulated about $55 million in assets. It charges a 0.45% management fee, which amounts to a 0.64% MER along with a 0.04% trading expense ratio (TER). RBOT tracks the Indxx Global Robotics & Artificial Intelligence Thematic Index, which focuses more on applied robotics and automation rather than just software, including healthcare companies like Intuitive Surgical and foreign manufacturers like Yaskawa Electric Corp.

Investing in any of these ETFs is straightforward. Simply enter the ETF’s ticker in your brokerage application, decide on the number of shares you wish to buy and at what price (using a limit order is recommended), and be patient as your transaction completes.

The future of AI ETFs in Canada

While the rapid expansion of the AI sector and the flurry of new AI ETFs in Canada are undeniably exciting, I can’t help but draw parallels with the dot-com bubble of the late 1990s, particularly the rise and fall of Cisco Systems. 

At its peak, Cisco briefly surpassed Microsoft as the world’s most valuable company, with a market cap nearing $500 billion, riding the wave of the internet and networking boom.

Had thematic ETFs been around during the dot-com era, they likely would have centred around internet infrastructure, much like how today’s thematic ETFs focus on the latest in artificial intelligence. We all remember how that bubble burst, however. While companies like Cisco survived and left behind valuable innovations (others didn’t), many investors who bought in at the frenzy’s peak suffered losses from which have yet to fully recover.

Are we seeing the same today with AI? It’s hard to say, but the resemblance is striking, and caution is certainly advised. History doesn’t always repeat itself, but it often rhymes. 

I’ve laid out the essentials to help you understand these new AI ETFs as a Canadian investor. Now, it’s crucial that you conduct thorough due diligence and consider how they fit—or don’t fit—within your portfolio strategy before making any decisions.

More about investing in ETFs:

• Best ETFs in Canada for 2024
• Robo-advisor or all-in-one ETF: which is best for new investors?
• The MoneySense ETF Screener
• Nvidia’s stock market value tops $3.3 trillion

About Tony Dong, MSc, CETF

Tony Dong has been published on USA Today, U.S. News & World Report, TheStreet and more. He is also the lead ETF analyst for ETF Central, and he holds The ETF Institute’s Certified ETF Advisor designation.

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