Artificial intelligence, or AI, has been the talk of the investing town, not just in Australia, but the world over. The incredible rise of this technology, whose applications are only just becoming evident, has taken the globe by storm. The largest companies on the planet are pouring unprecedented amounts of cash into building out their AI capabilities, and investors are taking notice. But what is the best way to invest in AI on the ASX? That's what we'll be discussing today.
AI's potential uses are almost infinite. No one doubts that this technology will redefine business, the economy, and everyday life over the coming years.
But whilst this limitless horizon abounds with potential, the frontier that we find ourselves in also poses risks to investors.
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Artificial intelligence: The internet of the 2020s?
After all, the early days of the internet also elicited huge investor interest. However, it was exceedingly difficult to pick the eventual winners of the internet before they became apparent. For every Alphabet and Amazon, there was a Yahoo or a pets.com.
Many investors who got on the internet train early ended up being wiped out by the dot-com bust of the early 2000s. Given that AI is in a similar stage of infancy in 2026, I see similar risks for ASX investors looking to ride on the back of the AI train.
The companies that appear to be at the forefront of the AI vanguard today may not retain their place in the years ahead. That makes this game a dangerous one to play for ASX investors, in my view. So what's the solution? Well, I think a good approach to this conundrum is to employ the use of ASX exchange-traded funds (ETFs).
ETFs have the advantage of being able to passively pick winners. Most ETFs invest in an index that is weighted to market capitalisation (a company's size). If a company does well over time, its weighting in an index will increase. As such, any ETF or index fund that uses said index will be forced to buy more of that company's shares. Of course, the opposite is also true, and any company that stutters will be removed.
Sure, this approach will not give investors the equivalent thrill and returns of buying, say, Alphabet, at the dawn of the internet. But, given the lottery-like chances of picking the biggest AI winner of 2036 in 2026, I think it is a more prudent choice.
Using ASX ETFs to invest in AI
But which ASX ETFs should investors buy if they wish to reap some of the potential returns of AI? Well, I think US-market funds are a good place to start. The US is unquestionably at the forefront of AI. Even a market-wide index fund like the iShares S&P 500 ETF (ASX: IVV) is, even now, dominated by AI-centric stocks like Alphabet, Microsoft, Nvidia, and Tesla.
If you wanted to go even harder on the US, the BetaShares Nasdaq 100 ETF (ASX: NDQ) is also an obvious choice.
But if an investor wants to exclude the other stocks that populate the US markets, but are not necessarily vying for a spot at the front of the AI pack (perhaps Coca-Cola or Colgate-Palmolive), then an ETF like the Global X Artificial Intelligence ETF (ASX: GXAI) is also worth a look. Yes, this ETF is more expensive than an index fund like IVV or NDQ. But it will give you a purer AI investment in exchange. Some of this fund's top current holdings include Samsung, Intel, Broadcom, and Taiwan Semiconductor Manufacturing Co.
If an ASX investor really wants to buy into the potential future of AI, I think these ASX ETFs are the most sensible way to do so.
