Well, I guess it was inevitable.
By "it," of course, I mean the launch of an exchange-traded fund that is, as the issuer puts it, "designed to provide exposure to companies involved in the investment theme of artificial intelligence ("AI"), generative artificial intelligence, and related technologies."
If you have been keeping track of the cutting edge (bleeding edge?) of ETF products, the name Roundhill Investments should be familiar. This independent ETF issuer has once again jumped to the front of the zeitgeist-capturing line with the recent launch of the Roundhill Generative AI & Technology ETF (CHAT) .
I once had a boss that would get very excited about developing investment products based on how many talking heads he saw on CNBC jawboning about the latest hot topic. The old boss doesn't work at Roundhill, but seeing this launch took me back to conversations we used to have about "trades" vs. "investments." Let's take a look at CHAT and see where this fund lands in that opportunity spectrum.
You've undoubtedly heard of AI. This is the technology that at the most basic level includes some code I wrote that recognizes when a date is on a weekend and selects the last business day of the previous week, even taking into account holidays. More intricate versions power personal digital assistants like Apple's (AAPL) Siri and Amazon's (AMZN) Alexa. Even more complicated implementations power facial recognition software, military missile guidance and targeting systems, and of course, autonomous vehicle guidance systems like Tesla's (TSLA) Full Self Driving (FSD) platform. The difference between AI and Generative AI is that AI works with a defined set of parameters to produce a specific outcome and Generative AI lets you do things like ask it to produce a description of Yankee Stadium in the style of Ernest Hemmingway as I did for an article I wrote earlier this year, or tell Photoshop to create new elements in photographs, as you can now do with the new firefly add-in from Adobe (ADBE) . These are the kinds of AI that have writers, actors, musicians, and artists in general worried about their professional futures as evidenced by the current Writers Guild of America's strike that's affecting the continued development of this season's shows and movies.
Like many new technologies, the scope of what falls under the definition of AI and AI adjacent is fairly broad. In reviewing the fund's prospectus Roundhill has decided to focus on companies that provide goods and services in the following areas including AI or Generative AI software development, cloud infrastructure with a focus on AI model training, semiconductor manufacturers with an AI focus, network infrastructure with a focus on AI support, AI services like consulting and implementation services for generative AI software. From there, eligible activities expand to the point where they include "diversified consumer services, broadline retail, and entertainment companies."
Regarding revenue exposure, the security selection process is a little confusing if only because it talks on the one hand about needing 50% revenue exposure to qualify but then discusses a ranking process that considers companies with as little as 10% exposure. Regular readers know my take on the 50% threshold and if you don't, I like to see at least 75% exposure for any fund that promises targeted exposure.
Wrap it Up
While Roundhill does a good job outlining the opportunity, and there are some names in the fund that are squarely focused players, like Sensetime (local ticker 20-Hong Kong), C3.AI (AI) , and Iflytek (local ticker 002230-China) those names account for just over 13% of the portfolio. Otherwise, the fund is stocked with what I'll call the "usual suspects" of Amazon (AMZN) , Nvidia (NVDA) , AMD (AMD) , Microsoft (MSFT) , IBM (IBM) , and Alphabet (GOOGL) (GOOG) . While these companies are important to the ongoing development and support of AI, there are simply too many other sources of revenue that drive these companies' results. If you are interested in this fund, I'm not going to dissuade you from investing but just understand that it really is providing broad tech exposure with a tilt to the emerging AI industry. My hope is that as this industry develops further that the portfolio managers have an opportunity to stack the fund with truly AI-focused companies. Given the history of "first mover advantage" in ETF-land, I can't blame Roundhill for planting its flag with CHAT.
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