As the AI hype floods the market, how do you invest in AI? VettaFi Financial Futurist Dave Nadig joins Yahoo Finance Live to discuss how best to invest in AI, the top artificial intelligence ETFs, and whether or not it's just a hype cycle.
Video Transcript
AKIKO FUJITA: Well, US markets posting strong gains so far this year. But we've seen even larger gains in markets around the world. Recent data shows that inflows are moving into international stocks. And our next guest says it pays to be diversified. Joining us now is VettaFi Financial Futurist Dave Nadig. For this week's ETF report brought to you by Invesco QQQ.
International markets, one that we've been hearing a lot. But we're talking about a number of different markets, EMs, Europe, as well as Japan. Where are you seeing the inflows?
DAVE NADIG: Well, the inflows for this year so far have been pretty strongly in international equities, which has been a big surprise. Historically, the US runs about a 70% home bias. So every $10 that goes in, you'd expect about 7 to be US equities. It's kind of been the opposite this year. We've had about 33, $34 billion into international equity. 20 and change into US equity.
A lot of that focus has been on Europe. Europe a lot of the managers I've talked to have seen Europe as the place to look for the rest of 2023 and next year for growth. Some of that's just diversification, not just of types of companies, but regulatory regimes.
Things are really bifurcating between the US and the rest of the world in a couple of areas-- AI, crypto regulation, even core financial regulation. They are now really significant differences. Those regulatory differences can create opportunities.
So we've seen Europe outperforming the S&P by about 5% or 6% year to date so far on a hedged basis. And I think that's an important thing there. Hedging an exposure like Europe or Japan can make a lot of sense when we have a lot of central bank activity still happening.
SEANA SMITH: So, Dave, talk to us about some ways more specifically that investors can play this in terms of the funds that would give them exposure then to that play.
DAVE NADIG: Sure. So when we see a lot of is the WisdomTree hedged Europe, which is ATDJ I recall. It's up about 16%, 17% so far this year. And basically, it just buys a basket of stocks denominated in the euro and then hedges out all that euro exposure.
So you're not stuck in this game of trying to make a bet both on whether or not a company is a good company or a country is a good country. But also whether or not the central bank policies between them and the US are going to line up in a way that's particularly favorable to have shorted the dollar and bought the euros in the first place.
So I think it's a good time for folks to relook at that international exposure and consider that currency impact.
AKIKO FUJITA: Yeah, the regulatory bifurcation is interesting point because we have started to see that. One area where regulation has not fully taken shape yet is AI, one we like to talk about a lot. I mean, there's so many different plays that we've heard from analysts we've had on the show. But how do you look at it from a passive investing perspective?
DAVE NADIG: Well, there are index based products that you can look at to approach there. At VettaFi, we run an index behind the robo ETF or ROBO. The biggest player in the space would be BOTZ, B-O-T-Z from Global X. And those kinds of passive approaches can make a lot of sense when there's still a lot of moving parts on the field.
We've seen more performance out of those types of products than we have out of some of the ark type products, the more innovation equity active management strategies. They certainly have looked at AI, but we haven't seen the kind of deep weighting in that we've seen. Things like BOTZ, BOTZ is up over 40% this year by itself largely because it was so heavily invested in Nvidia.
And we remember what that earnings report looked like the other week, right? So those kinds of plays can really help. I should caution, though, that those are very concentrated bets. Anytime you're looking at a theme, you should think about this as a speculation, not as a core holding because these stocks are going to move with the hype cycle in the headlines.
SEANA SMITH: So then the flip side of it would be you're also, I would guess, maybe then recommending some exposure to AI through some of those larger tech giants, like a Microsoft, like Google that have an AI play, but clearly much more diversified than those peer players.
DAVE NADIG: The question is we already all already own those things, right? I mean, if you own the queues, you own the S&P 500, you already have big exposure to most of the companies that are investable. The problem is a lot of the interesting work is being done either in non-public companies like OpenAI, behind ChatGPT or in small startups that we obviously can't get access to yet.
So because it's still such early days, there's this weird bifurcation where the things you can buy may be a little too diluted to be considered a real play on the space. You can't buy the things that would be a pure play. I think the smarter move is to look at the industries and companies that are going to be most impacted by AI. That's things like health care, transportation, logistics, factory, retail.
We've already seen massive benefits there from robotics and AI. That's going to be, I think, we're going to continue to see that growth.
AKIKO FUJITA: We've heard so many guests talk about the picks and shovels when we talk about AI.
DAVE NADIG: Yeah.
AKIKO FUJITA: I mean, what about that sort of the foundational plays, whether it is Nvidia or just other semiconductor names? Is that a good way to sort of bet on the future of AI?
DAVE NADIG: I think that's a good way to bet on the future period. Right. I mean, I think AI is going to be a subtheme of a bit of a tech bubble we're going to run into here. AI is going to enhance productivity. It's going to increase margins in those tech companies. Yes, but also in the companies that they serve. So think about your tech exposure in general. Think about where that's got the focus.
And if you want to load up a little bit in some of the automation and AI plays that are real world and maybe even a little more industrial than tech, that's where a product like bots or ROBO is going to work for you.
AKIKO FUJITA: OK. Dave Nadig, good to get your takes. Appreciate your time.
DAVE NADIG: Thanks for having me.
