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Is A.I. the Big Theme for 2023?

Breakthrough technology can have an immediate transformative impact on the broader world and capital markets, regardless of macroeconomic conditions. Right now, that disruption is ChatGPT.

The simple-to-use A.I.-generated chatbot, launched in November of 2022, has already transformed the use of A.I. for writing, research, and language translation. ChatGPT ‘s machine-learning algorithm is constantly evolving to refine and improve its processes, so, effectively, the more it is used and the more data it acquires, the better it gets at analyzing and curating data into a piece of work.

The broader corporate world will likely adopt ChatGPT and other A.I. related programs to automate expensive research and data-intensive processes. In the few months that the A.I. technology has been on the market, it has passed the Wharton MBA exam, the Medical College Admission Test (MCAT), and will likely be capable of passing the Chartered Financial Analyst (CFA) Level III in June. Not only has it automated the work of historically well-educated and well-paid professionals, in areas such as investment research, legal research, journalism, and customer service, but it has also begun to seep into the cyber-security industry.

ChatGPT has the potential to pose an existential threat to these professions and the larger A.I. development industry, while presenting a huge windfall for, OpenAI, the company that owns the technology.

OpenAI, which started as a non-profit A.I. lab and incubator, is now worth more than $30 billion*. Microsoft recently made a multi-year $10 billion investment in the firm. The investment is likely a step towards ChatGPT being hardcoded into Microsoft Bing, which would use the technology to compete with Google’s core search business.

Without a stock to invest directly in, the technology has created an investment frenzy in the broader A.I. ecosystem for companies that support its usage or those developing competitive technologies. The undeniable impact of ChatGPT is that A.I. is now becoming the hottest thematic investment of 2023.

*ChatGPT Creator OpenAI in Talks for $29 Billion Value, WSJ Says – BNN Bloomberg

As Bloomberg News highlights (note: of the companies listed below, only NVIDIA is held in our CHPS ETF):

  • Nvidia Corp., the semiconductor maker, has been identified by Wall Street analysts as a beneficiary of greater investment in A.I. since it dominates the market for graphics chips that provide the computing power behind the A.I. models. NVIDIA is first and foremost a graphics processing unit (GPU) maker, and GPUs are the key foundational technology in building A.I. systems.  Its shares rallied 34% in January, Nvidia’s best month in almost six years.  As at February 3, 2022, the stock is up 44.38% on a year-to-date basis
  • ai Holdings Inc., which uses artificial intelligence to help customers analyze data, has seen its share price increase approximately 500%, on a year-to-date basis, as at February 6, 2023
  • BuzzFeed Inc., jumped more than 300% over two days from the end of January to early February 2023, after its Chief Executive Officer pledged to make A.I.-inspired content part of its “core business
  • ai Inc., another software maker, which counts Raytheon Technologies Corp. and Baker Hughes Co. among customers, rallied a record 77% in January 2023

Why Semiconductors could be the best way to play A.I.

While some are more akin to outlier meme stocks that are taking advantage of a frenzy in this space, there is a very direct and effective way to invest in the growth of artificial intelligence and that is through semiconductors.

GPUs are the most important piece of hardware as it relates to running and developing A.I.-based systems. A.I. systems rely on GPUs for computational power to analyze massive breadths of data. The makers of the most advanced GPUs are ostensibly going to generate the most amount of interest from entities looking to get a leg up in A.I. development. Remember the key determinant of success for A.I. is how quickly it can learn and adapt to both processed data and make recommendations based on that data in a way that can be easily communicated to humans, or in the case of Chatbots, like ChatGPT, communicate exactly like a human.

2022 was an exceptionally difficult year for semiconductor stocks overall. Although most of this was experienced in the first three quarters of the year as interest rates increased, falling demand caused by the crypto-crash, and supply chain difficulties in East Asia all negatively impacted the category.

The massive adoption of ChatGPT and the likely full reopening of the Chinese economy have earned semiconductor stocks large returns. Demand for A.I. applications and industrial mandates in China should more than offset the input costs of growing interest rates and inflation of components.

Below are the top-ten holdings of the Horizons Global Semiconductor ETF (CHPS), Canada’s only semiconductor-focused ETF, and the associated returns from the holdings.  Most of the major names in the portfolio have generated very strong returns since the new year.

Performance of Top 10 holdings of CHPS:

Name Weight (%) 1 Mo (%) 3 Mo (%) 6 Mo (%) YTD (%) 1 Yr (%)
NVIDIA Corp 11.27 33.69 44.78 7.62 33.69 -20.14
Taiwan Semiconductor Manufacturing Co Ltd 10.20 19.04 44.59 3.29 19.04 -22.55
Broadcom Inc 9.07 4.63 25.48 11.10 4.63 3.07
ASML Holding NV 8.94 21.33 38.96 16.23 21.33 -0.58
Texas Instruments Inc 6.12 8.03 11.11 0.54 8.03 1.54
QUALCOMM Inc 5.83 21.17 13.89 -7.10 21.17 -22.61
Intel Corp 4.52 6.92 0.69 -20.36 6.92 -39.83
Advanced Micro Devices Inc 4.09 16.03 25.12 -20.45 16.03 -34.22
Applied Materials Inc 3.36 14.49 26.58 5.72 14.49 -18.57
Analog Devices Inc 3.22 4.54 20.77 0.65 4.54 6.54

Source:Bloomberg as at January 31, 2023.

CHPS in total has had a strong return year-to-date, delivering a 16.35%* return for the period ending January 31, 2023.  In the table below, we compare CHPS to the Horizons Robotics and Automation Index ETF (RBOT) and the NASDAQ-100 Index. RBOT has also benefitted from the resurgence in A.I. theme investment – NVIDIA is a 9% weight. Our view is that semiconductors are more of a direct driver for exposure to A.I. due to the hardware’s importance in artificial intelligence infrastructure and expansion.

Performance Data as at January 31, 2023

Bloomberg Ticker Name 1 Mo (%) 3 Mo (%) 6 Mo (%) YTD (%) 1 Yr (%) 3 Yr (%) 5 Yr (%) SIR (%) Inception date
CHPS CN Equity Horizons Global Semiconductor Index ETF 16.35 26.11 0.49 16.35 -18.47 -7.43 06/22/2021
SOCGSEMN index Solactive Capped Global Semiconductor Index NTR 16.37 26.57 2.22 16.37 -15.42 19.06 15.07 18.96 08/17/2017
RBOT CN Equity Horizons Robotics and Automation Index ETF 14.13 19.21 3.98 14.13 -21.82 1.23 -2.23 -1.09 11/28/2017
XNDX INDEX NASDAQ-100 Total Return Index 10.67 6.36 -6.11 10.67 -18.23 11.30 12.76 8.75 03/04/1999

*Source:Bloomberg, as at January 31, 2023

The indicated ETF rates of return are the historical annual compounded total returns, including changes in unit/share value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Additionally, index returns do not take into account management, operating or trading expenses that may be incurred in replicating the index. The rates of return above are not indicative of future returns. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated. The indices are not directly investible. Only the returns for periods of one year or greater are annualized returns.

What’s the best way to invest in A.I.?  CHPS provides a compelling way for investors to get direct exposure to the rapidly growing theme, while also getting broader exposure to the growing demand for semiconductors. Of all of the major technology themes, this could be the one that offers the most upside potential for the remainder of 2023.

Commissions, management fees and expenses all may be associated with an investment in the Horizons Global Semiconductor Index ETF (CHPS) and Horizons Robotics and Automation Index ETF (RBOT) (or collectively, the “ETFs”) managed by Horizons ETFs Management (Canada) Inc. The ETFs are not guaranteed, their values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the ETFs. Please read the prospectus before investing.

Certain statements may constitute a forward-looking statement, including those identified by the expression “expect” and similar expressions (including grammatical variations thereof). The forward-looking statements are not historical facts but reflect the author’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These and other factors should be considered carefully and readers should not place undue reliance on such forward-looking statements. These forward-looking statements are made as of the date hereof and the authors do not undertake to update any forward-looking statement that is contained herein, whether as a result of new information, future events or otherwise, unless required by applicable law.

This communication is intended for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to purchase exchange traded products (the “Horizons Exchange Traded Products”) managed by Horizons ETFs Management (Canada) Inc. and is not, and should not be construed as, investment, tax, legal or accounting advice, and should not be relied upon in that regard. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies. These investments may not be suitable to the circumstances of an investor.

All comments, opinions and views expressed are generally based on information available as of the date of publication and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

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