AI adoption expands: Different ways to play the trade

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a day ago

Artificial intelligence (AI) adoption is expanding beyond tech giants as investors look to utilities, real estate, and healthcare for exposure. Jay Jacobs, BlackRock US head of equity ETFs, joins Market Catalysts to explain how AI adoption is reshaping the broader market.
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I want to bring in Jay Jacobs, BlackRock US Head of Equity ETFs for this week's ETF Report brought to you by Invesco QQQ.
So Jay, I know that you guys focus on sort of large long-term themes, and that AI falls squarely into that bucket. Nonetheless, if investors are investing in this theme, and from what we have seen of sort of technological waves in the past, sort of what does the cadence look like? In other words, you know, we've obviously had crashes in the past sometimes when you have certain technologies being adopted. What do you think the cadence of this one is going to look like?
Well, this is very much a long-term theme. In the short term, the market is constantly trying to price in what is the value of artificial intelligence. Is it single digit trillions of dollars? Is it double digits trillions of dollars? That still remains to be seen, but the reality is that we see this as having a tremendous amount of economic impact akin to what we've seen with the rise of the internet, and we're still very much in the early stages in this build out phase where we're seeing tons and tons of capex to build out the data centers, build out the models before we see the widespread enterprise adoption that will drive a lot of revenue in this space.
Well, and Jay, another interesting aspect of this is that we have seen, you know, we keep talking about the broadening, the broadening, broadening. Even with a, within the AI trade, there's been broadening. We talked to Scott Chronick from City yesterday, and he pointed out that the rally, for example, we've seen in something like industrial stocks is really ties back to AI as well, because so many different parts of the economy are being touched by this. So how should investors be thinking about where to go?
I think that's exactly right. I mean, look, we've seen a rally in some real estate stocks that are building the data centers. We're seeing a lot of enthusiasm amongst investors around utilities that are generating power because there's going to be so much power demand for artificial intelligence. So there's a very broad ecosystem. You can look at it from kind of a technology lens, but you can really look at it from a whole economy lens. One of the maybe lesser appreciated areas with AI is healthcare. Can you reduce costs and speed up the development of pharmaceuticals with artificial intelligence? Can you structure a lot more data from doctors around patients using artificial intelligence? So using this as a tool to make industries more efficient could be very beneficial to some of these stocks.
Do you think it's too early to get in on that kind of a theme? You know, it's better to look at some of those other sectors. I mean, as you know, healthcare has been a pretty underperforming sector.
I don't think it's too early. Just investors need to expect that this is going to be a long-term play. I would not want people to be thinking about this as kind of a weekly or monthly trade. If you are buying the AI theme for its potential for disruption, this is a 10-year play. You can get in today, but you have to kind of watch the volatility and just sit back and and look at the long term for this.
And and speaking of the long term, I mean, we we do have fits and starts, right? You've got something like a core weave pulling back today. Um, you have the release of ChatGPT5, which has seen its share of critics, right? So, you know, as people watch those daily headlines, how should that affect their thinking? I mean, I understand keeping it long term, but shouldn't you also incorporate kind of what's going on, what the latest news flow is on it?
Well, I think one of the shifts that we want to keep our eye on is when do we go from this build phase with so much focus on capital expenditures and this infrastructure build out to more of the enterprise adoption stage? And maybe that's going to be from new large language models that are ever more powerful. Maybe it's going to be from new contracts with governments or major corporations that are adopting AI. But that's what we want to see. The progress is going to happen from the build out to the enterprise and and government adoption. So when we look at some of our active strategies, like BII, that's actively managing exposure to AI stocks, what we would expect is maybe some of a shift away from capex and more to the large language models and application users as you see that adoption happening.
Have you guys seen any slow inflows to any of these products, or is it just like up up and away?
It is accelerated. Uh, what we've seen is billions of dollars come into our AI suite in the last couple of months, regularly seeing very significant inflows. It's happening both on the active side with BII, more of the whole value chain with RDI, which is our index-based AI ETF. Uh, investors are recognizing that not only is this a hot theme, but they're not really getting good exposure to it through just the S&P 500 or through a tech sector ETF. They really need a dedicated allocation to capture the AI value chain.
I'm glad you brought up that point because, you know, all year, and not just this year, I mean, for a few years now, we've been talking about the concentration in the S&P 500, and that it is overindexed to these plays. So why then do people not see just buy the S&P and forget it? And why do they want to be even more concentrated?
Well, the mag 7 is just a really narrow sliver of what the AI value chain is. You know, most of those companies are in the large language model space, and maybe one or two are kind of in the hardware semiconductor space. Uh, but when you look beyond that, we talked about the data centers, we talked about the power, there's a much wider range of semiconductor stocks that are going to be playing into the AI space. Those companies that are using AI to build new products and applications. So if you really think expansively across this tech stack, this is not about seven companies. This is more like 30, maybe even up to 50 companies that are going to benefit. So you can really get much more diversified across AI, and at the same time, really kind of focus on this theme by selling the tech sector and buying an AI ETF.
At the same time, the implication is, if this is going to continue on as it has been, that it will help the broader market as well. I mean, do you see any slowdown in this push to record highs as long as this AI trade is working?
AI can be a major tailwind for the entire economy, and and there's a few reasons why. One, obviously, you know, the US has been an incredible tech innovator. Tech is a huge part of the S&P 500. So generally speaking, it could rise, you know, rising tide could lift most ships. The reason why I say most ships though is that this isn't just one directional. There are companies that are going to be heavily impacted negatively by artificial intelligence. Their business models could be upended by AI. So
Do we know what they are yet?
Well, we we somewhat. I mean, I think one of the areas where it could kind of fall on either side of this coin is in software companies. Some software companies can get much more efficient and develop software more quickly with artificial intelligence. Other software companies could really be kind of disintermediated by AI because if you were licensing software from someone for a while, and now you could build that software very quickly using your own large language model, why would you pay, you know, this company over here for it? So there there's there's certain industries that I think is a little bit more up in the air kind of how it's going to play out. There's also industries that are very insulated from artificial intelligence, and these are some of the industries that we've really liked on some of our thematic rotation ETFs, like throw. Think about infrastructure names, construction names, some real estate names. Hard to see how AI is going to change those business models today when AI lives much more in the services world than in like construction, for example.
IRL stuff that you can't get AI to do. A machine is an earth moving machine is an earth moving machine, I guess.
Well, and it's somewhat ironic because if we went back 10 years ago, the expectations were that robotics would be really the bleeding edge of artificial intelligence, that we could automate kind of lower skilled physical jobs. The reality is it's the services jobs that have been much more kind of augmented by artificial intelligence.
Jay, good to see you. Thanks for coming in. Appreciate it.