BlackRock’s iShares Future AI & Tech ETF has lagged far behind the S&P 500 this year. (Michael M. Santiago/Getty Images)

Weird Money

The best AI fund of 2024? The S&P 500.

High-fee AI ETFs are great for asset managers, but not so good for investors.

Jack Raines

9/3/24 2:24PM

If I asked you to name the defining technological trend of the past two years, you would probably say, “artificial intelligence,” and if I asked you how artificial intelligence stocks had performed over the last two years, you would probably say, “Pretty well!” Even after its recent sell-off, Nvidia is up ~900% since Fall 2022, SMCI is up ~700%, Meta has tripled, and Microsoft has gained roughly 80%. And yet, according to The Wall Street Journal’s James Mackintosh, every AI-themed ETF has underperformed the S&P 500:

Pity the investors in the three 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 (down 15% this year), Chinese cloud computing (down 21%) and pet care (up 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 of the 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.

How have so many artificial intelligence funds underperformed the S&P 500? Well, for starters, the S&P is top-heavy with some of the biggest current winners of the AI boom: its six largest components, which make up 28% of the index, are Apple, Microsoft, Nvidia, Amazon, Meta, and Alphabet. Meanwhile, the six largest positions in BlackRock’s iShares Future AI & Tech ETF are Broadcom, Nvidia, AMD, Palantir, Fortinet, and Accenture. While I do appreciate BlackRock including Accenture, a management consulting firm with $3.6 billion in annualized generative AI bookings, in its AI ETF, it’s surprising that the asset manager weighted it heavier than Amazon, Microsoft, Alphabet, and Taiwan Semiconductor.

The issue at hand is that betting on market trends and betting on individual companies are two very, very different endeavors. An association with “AI” doesn’t guarantee that a company’s stock will benefit from AI, at least not in the long-run. AI has to, at some point, translate to cash flow for the business. Compounding this issue is the fact that “trend” winners might be concentrated, but ETFs tend to be diversified. Nvidia’s market cap may have increased by 900% since Fall 2022, but if a fund has a max position size mandate, it will be forced to diversify into worse-performing companies (such as, you know, Accenture and Intel).

Imagine, for example, that you invested in an “electric vehicle” ETF in 2022 that was equal-weighted to Tesla, Fisker, Nio, Nikola, Canoo, Lucid Motors, and Rivian. While Tesla has been roughly flat over that time, the other companies are down significantly. Increasing electric vehicle adoption did not necessarily mean that all electric vehicle stocks would do well. The businesses themselves matter.

So why, given the underperformance, do so many asset managers issue thematic ETFs? Because they can charge hefty fees and expenses. BlackRock’s iShares Future AI & Tech ETF charges 0.47%, while the expense ratio on its S&P 500 ETF is just 0.03%. Thematic ETFs are lucrative for asset managers, regardless of how their investors fare. If you want to play the AI trend (or any market trend, for that matter), it’s probably best to either do your own due diligence on winners and losers or simply stick with index funds.

Max Knoblauch11m

Bullish options flows boost Rivian

EV maker Rivian is up nearly 5% on Monday afternoon as bullish options flows lift the stock ahead of its third-quarter earnings, set to drop next week.

According to Bloomberg, Rivian call options traded outnumber put options more than 5 to 1, for a put/call ratio of less than 0.2 as of 2:38 p.m. ET. That’s significantly less than the 20-day average p/c of 0.4. More than 116,000 call options have changed hands, more than 60% above the full-day average over the past 20 days.

Rivian’s upcoming earnings will measure the automaker’s sales ahead of the expiration of the $7,500 EV tax credit. Since September, Rivian has performed two rounds of layoffs as it seeks to cut costs amid the end of regulatory credits and ahead of next year’s lower-cost SUV launch.

Matt Phillips1h

Palantir inks defense deal with Poland, touches new intraday high

Palantir Technologies touched a new intraday high of $192.83 early Monday, as the company rode the China trade truce rally in AI tech stocks and retail favorites.

Palantir also signed a new deal to supply the government of Poland with data, AI, and cybersecurity software, according to Bloomberg.

Polish Minister of Defense Wladyslaw Kosiniak-Kamysz and Palantir Chief Executive Officer Alex Karp signed the letter of intent on the deal, about which few details were released. Polish officials did signal that they were interested in Palantir software systems for “battlefield management” and logistics. Up more than 150% this year, Palantir reports Q3 earnings on November 3.

Poland Signs Palantir, Anduril Deals Amid Record Army Spending

J. Edward Moreno3h

Intellia tanks as it pauses late-stage CRISPR gene-editing trials after one patient was hospitalized

Intellia dropped sharply on Monday after it announced that it’s pausing two late-stage CRISPR gene-editing trials because one patient was hospitalized with liver damage.

Intellia had also disclosed in May that a patient had experienced elevated liver enzymes. The news is a major setback for the company, which currently has no products on the market and is working on a one-time treatment for heart and nerve conditions.

The news dragged down other companies working on CRISPR treatments, including Beam Therapeutics Inc, Crispr Therapeutics, Editas Medicine, and Prime Medicine.

Luke Kawa3h

Gold craters as retail traders pull money from commodity ETFs

As its fierce rally begins to fade, it looks like retail traders are waving au revoir to gold.

JPMorgan strategist Arun Jain noted that retail traders have pulled about $120 million from commodity ETFs as of 11 a.m. ET on Monday, a level that stands in the 0.4th percentile relative to its one-year average. The SPDR Gold Shares ETF is down 2.8% as of 11:53 a.m. ET after suffering its worst loss since April 2013 last Tuesday. That day, retail had pulled just $50 million from commodity ETFs by 11 a.m.

The five-session average daily flows into the product hit an all-time high of nearly $1.1 billion last Monday as gold and silver had effectively become the new meme stocks, displaying strong momentum and heavy options activity.

Luke Kawa3h

POET Technologies tumbles after announcing $150 million share offering to two new fundamental investment managers

POET Technologies is tumbling after announcing that it’s selling 20.7 million shares to raise approximately $150 million in an oversubscribed registered direct offering “by two new fundamental investors.”

Its prior $75 million raise through the sale of stock and warrants earlier this month is widely presumed to have been to MMCAP International, which was already its largest shareholder.

“We’ve been very pleased with the level of interest in POET by investors of all types — retail, institutional,” POET Executive Chairman and CEO Dr. Suresh Venkatesan recently told Sherwood News, saying that the company’s focus this year is to make sure that “the technology that we’re developing is truly manufacturable at scale and at wafer scale.”

The optical communications company has enjoyed elevated interest from retail investors recently as the AI boom raises the demand for data to be transferred as quickly and efficiently as possible. Last week, POET announced a $5 million order for its optical engines from a “leading systems integrator.”

Per the press release, POET “intends to use the net proceeds from this investment for corporate development, including targeted acquisitions, scaling up of R&D, acceleration of the light source business, expanding operations, and general working capital.”