Artificial intelligence (AI) investing contributed massively to market performance in 2024, and looks set to play an important and growing role in 2025 and beyond. According to analysis by Capital Group Canada, the global AI market is projected to reach almost US$2 trillion by 2030. For investors and advisors, harnessing the rise of AI as a driver of equities performance will be an important goal.
A passive approach, however, may be less effective as there is a high level of concentration in a select number of companies with AI exposure. These companies, called the “Magnificent 7”, may add too much risk to portfolios. While not necessarily a “bubble,” these megacap tech firms have had incredibly strong runs and their share prices reflect that in high valuation multiples. An active approach could, instead, prove fruitful, as the portfolio manager can select which of the Magnificent 7 to invest in and at different weights lowering overall risk.
Further, there are opportunities outside the Magnificent 7 with links to AI that are not only less expensive, but potentially less risky should there be a market pullback.
For example, an active AI investing approach could lean more heavily into the so-called “picks- and-shovels" firms that support AI, like utilities powering data centres, semiconductor firms, and data center HVAC providers.
“AI is creating opportunities for companies well beyond the big, early winners,” says Jeremy Burge, who is a portfolio manager on both Capital Group Global Equity Select ETFTM (Canada) CAPG and its mutual fund namesake, Capital Group Global Equity FundTM.
What kind of companies might fall into that category best served by an active AI investing approach? Caterpillar (CAT), for example, tested a new hydrogen fuel cell technology for a data centre last year, per Capital Group Canada research. That kind of infrastructure spending represents an intriguing downstream impact of AI that doesn’t traditionally fall into “tech.”
Harnessing AI investing’s potential should be a key goal for investors for years to come. While options abound, an active approach, looking to outperform within the AI tech space, may merit a closer look. Whether getting an active ETF for broad market exposure that includes AI, or looking to really lean in, it’s worth looking at active.