Beware: Not All AI ETFs Are Created Equal
On Wednesday, Nvidia (NVDA) shares surged an eye-popping 30%, adding over $200 billion to the company’s market cap and sending the stock to a new all-time high.
The source behind the strength? Incredible demand for the company’s new chips, which are expected to be the backbone for running many Artificial Intelligence (AI) systems that are in development.
It’s not just NVDA riding the AI wave, the biggest stock gains this year have come from companies that will either be supplying the tech to build AI infrastructure or businesses that will benefit from integrating AI features, such as Large Language Models (LLM). By some measures nearly all of the Nasdaq’s 100 (QQQ) 22% year-do-date gains have been fueled by AI related stocks such as Microsoft (MSFT) and Alphabet (GOOGL).
So, it might be surprising to find an AI ETF, like AI Powered Equity ETF (AIEQ), that not only didn’t participate in the rally on Thursday, but is actually down some 5% for the year to date!
This is just another reminder of the importance of doing research and making sure you know what you own. Magnifi is here to help.
Why has AIEQ fared so poorly despite seemingly being positioned dead center in the hottest investing trend in the market?
Well, the irony is, despite its name AIEQ doesn’t not invest in AI-related companies at all! What AIEQ does is use AI to pick stocks.
AIEQ owns no NVDA, Apple (AAPL), Microsoft (MSFT), or any number of the “in play” AI stocks. Rather, of its some 150 stocks in the fund’s holdings, its heaviest concentration of holdings, with a 31% weighting, are in the consumer discretionary sector. Names such as Wingstop (WING), William Sonoma (WSM) and Ollie’s Bargain Basement (OLLI) are among the fund’s top holdings.
Due to the name and similarity to other ticker symbols, some investors might have mistaken AIQE for the Global X Artificial Intelligence & Technology ETF (AIQ), which does count AAPL, NVDA, MSFT, GOOGL among other true AI-related names as its top holdings. AIQ is up a solid 21% for the year to date.
Launched in 2017 AIEQ is among the oldest of the artificial intelligence-powered ETFs, yet it only has a mere $105 million assets under management and the recent performance probably won’t help generate new inflows anytime soon.
“It is ironic that an AI-powered algorithm has not capitalized on the rally in big tech stocks that’s been driven by its own disruptive technology,” said Jessica Rabe, co-founder of DataTrek Research.
“AIEQ has previously tended to work best when it could catch momentum driven tech names in broad-based market rallies like during the pandemic crisis, but it’s clearly failed to do that this year,” she added.
Aside from not owning the best performing names, AIEQ’s best performance tends to come during bull markets when the models latch onto momentum trades, according to DataTrek’s Rabe. Given that the stocks are only recently coming out of an 18-month long bear market, and doing so in a herky, jerky fashion it’s somewhat understandable that AIEQ’s performance has been lackluster. Still, it has to come as a major disappointment that AEIQ’s algorithmic process stumbled so badly in not identifying the AI craze and failed to join the bandwagon, which started rolling over three months ago.
All this is to say, be aware, or even wary, of what are sure to be a slew of new ETFs offerings that will employ artificial intelligence to build and actively manage portfolios.
For example, just last week Roundhill Investments launched the Generative AI & Technology ETF (CHAT). According to Roundhill, CHAT will invest in companies advancing generative AI with the twist of applying the new technology to its own stock selection within the AI universe.
CHAT is off to a good start with its top holding being those usual suspects such as NVDA, MSFT etc. helping it to gain 4.1% since its launch on May 18th.
Time will tell how these AI-powered funds do over the long haul, but as Rabe of DataTrek says, “We find AIEQ is an interesting case study for asset allocators and stock pickers because its investment process differs from traditional approaches. But, as with some of what we are all learning from ChatGPT, different doesn’t always mean better.”
Let’s get a side-by-side view of the AIEQ and AIQ ETFs and let their metrics help you decide which is a better fit for your portfolio.
To further your research these funds and other ETFs, as well as other funds that can help power your portfolio, be sure to get access to Magnifi.
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