Yahoo Finance

Driverless cars, humanoid robots, the rapid development of generative AI has big implications for the future, but some of the tech has decades to go before it's ready for real world deployment. We're discussing where investors can play it today as part of our robotics week, and joining us now to discuss is JJ Jacobs, US head of Thematic and Active ETFs at BlackRock. Jay, it's good to see you. You just heard us talking to a pure-play robotics company, but you guys have an ETF that you've just sort of transitioned from being more robotics focused to being more sort of AI focused. So talk to me, first of all, about the thinking behind that and why that made more sense to you.

Look, I think there's an expectation from investors that if they buy a thematic ETF, they want that ETF to be able to evolve with the theme to provide as pure of an exposure as possible to the materialization of that theme. And what we've seen since 2018 is it's really been a bit of a bifurcation between artificial intelligence and robotics. AI is the mind, the thinking behind a lot of, you know, a lot of the software that's out there. Robotics is really more of the body, the physical world embodiment of that, whether that's delivery robots or automation. Where we've seen more demand from clients and where we've really been specifically getting questions is how do I more specifically play the AI space? We've seen the rise of generative AI, we've seen tremendous amounts of use cases for generative AI across sectors, across industries being used today. And so for us, we felt it was really important to transition this product to be really squarely focused on providing pure play exposure to the artificial intelligence theme.

And Jay, I'm curious. There are so many different areas of AI, right, when we say AI. There's companies that are going to use this to be more efficient and make money off that. There's companies like the big one we all know that's building the infrastructure for AI, right? I mean, where does the ETF sort of expose itself and are investors trying to get exposed to all versions of AI or are there different sort of baskets you should be putting yourself in there?

So we're looking to provide exposure across the value chain of pure play artificial intelligence companies. That includes everything from generative AI model developers to artificial intelligence infrastructure, software and data, as well as artificial intelligence hardware, you know, think semiconductors. The idea is that as you see more adoption of artificial intelligence, more use cases that are being put to work, whether that's pharmaceutical companies using AI to develop revolutionary drugs, legal companies using artificial intelligence to develop legal contracts more effectively, software companies using AI to accelerate programming, you name it. Whatever the use case is, we would expect more adoption of artificial intelligence to ultimately lift this basket of stocks. That is the idea behind really trying to be very, very specific about what is the value chain of artificial intelligence and who are the pure play companies across that value chain that will benefit from the materialization of this theme.

Jay, how do you all think about companies that say they will be AI companies? And I again, I know you can't talk about specific names, but I think of a Tesla where there's a report today that Apple is developing some sort of new tabletop device that'll have a robotic arm. And I'm just curious as you look at your criteria, how much you wait sort of the company's plans or are you focusing on companies that have products today?

It's a little bit of a balance, but ultimately, already our ETF is tracking a Morningstar index. And one of the benefits of that is Morningstar has an entire research platform where they're looking at companies around around the world that are involved in artificial intelligence and really trying to tease out what are their current revenues and artificial intelligence today and what do those revenues look like out into the future. So we're really trying to capture those companies that are pure play or are becoming pure play because of their investment in the artificial intelligence space.

And Jay, obviously one of the hot debates around AI right now is simply when it's going to contribute to profitability at some of these companies, right? Or boost their profits at a lot of these companies. I know a lot of companies are spending on AI, but when you're investing in something like this, I mean, what kind of time frame are people looking at here? Is this the AI trade that we're seeing play out in the market right now or is it the AI trade that might be getting a boost from AI in, say, three to five years?

So this is a structural trend and by that we mean this is going to play out over the course of a decade plus. Uh, so really short-term market volatility, maybe that creates some entry points for investors, but it really shouldn't really change the trajectory of this theme. But within that basket, you could see certain companies are going to be profitable sooner than others. You know, for example, if we look at AI infrastructure, that's where the profitability is today. Companies spending a ton of money to buy up semiconductors, to buy data centers, to buy, you know, proprietary data sets. Those are really benefiting right now, whereas with the model developers that are developing things like chat GPT or cloud or llama, they're going to be commercializing probably, you know, a few years out when you start to see that being profitable. So that's one of the benefits of investing across the value chain as you get this diversification across, you know, who's making money today versus who's building for the future.

And Jay, just quickly here, um, the ETF is down year to date. So sort of ask Josh's question a different way, you know, when do you think this is going to sort of catch fire if you will?

Uh, you know, I think we're seeing a really strong recovery right now just in the last couple of weeks. Uh, you know, we've taken off about half of the, uh, half of the sell-off over since August 5th. Um, this theme should really be playing out, uh, over the next six to 18 months. Now, again, this is a this is a decade long theme, but I think what we're going to see is the catalyst in the next six to 18 months is uh, uh, models getting more capable. We're going to see next generation of models that are going to use more inputs than ever before. Uh, we're going to see more use cases. So companies that have just starting to be thinking about artificial intelligence are now going to get their concrete plans about how they're going to incorporate artificial intelligence into their everyday. And I think we're going to see, uh, ultimately more competition in the space, which will be good because you'll see more companies coming in, more pressure on existing companies to innovate. Uh, and ultimately I think that'll create a better ecosystem. So I think the next 16, 18 months will be critical for, uh, for the artificial intelligence theme.

Jay, thanks a lot. Good to see you.