“How to Lose Money on the World’s Most Popular Investment Theme: Pity the Investors in the Three Artificial-Intelligence-Themed ETFs That Managed to Lose Money This Year”, 2024-09-01 (; backlinks; similar):
There are lots of embarrassing ways to lose money, but it is particularly galling to lose when you correctly identify the theme that will dominate the market and manage to buy into it at a good moment.
Pity the investors in the 3 artificial-intelligence-themed exchange-traded funds that managed to lose money this year. Every other AI-flavored ETF I can find has trailed both the S&P 500 and MSCI World. That is before the AI theme itself was seriously questioned last week, when investor doubts about the price of leading AI stocks Nvidia and Super Micro Computer became obvious.
The AI fund disaster should be a cautionary tale for buyers of thematic ETFs, which now cover virtually anything you can think of, including Californian carbon permits (+15% this year), Chinese cloud computing (−21%) and pet care (+10%). Put simply: You probably won’t get what you want, you’ll likely buy at the wrong time and it will be hard to hold for the long term.
Ironically enough, Nvidia’s success has made it harder for some AI funds to beat the wider market. Part of the point of using a fund is to diversify, so many funds weight their holdings equally or cap the maximum size of any one stock. With Nvidia making up more than 6% of the S&P 500, that led some AI funds to have less exposure to the biggest AI stock than you would get in a broad index fund.
This problem hit the 3 losers of the year. First Trust’s $457 million AI-and-robotics fund has only 0.8% in Nvidia, a bit over half what it holds in cybersecurity firm BlackBerry. WisdomTree’s $213 million AI-and-innovation fund holds the same amount of each stock, giving it only 3% in Nvidia. BlackRock’s $610 million iShares Future AI & Tech fund was also equal weighted until 3 weeks ago, when it altered its purpose from being a robotics-and-AI fund, changed ticker and switched to a market-value-based index that gives it a larger exposure to Nvidia.
The result has been a 20-percentage-point gap between the best and worst AI ETFs this year. There is a more than 60-point gap since the launch of ChatGPT in November 2022 lit a rocket under AI stocks—although the ETFs are at least all up since then.
…Dire timing is common across themes: According to a paper last year by Professor Itzhak Ben-David of Ohio State University and 3 fellow academics, what they call “specialized” ETFs lose 6% a year on average over their first 5 years due to poor launch timing.
…But mostly, look at the fees: They will be many times higher than a broad market index fund, and the dismal history of poor timing suggests that for most people they aren’t worth paying.
[Investing is hard, even when you’re right about everything…]