Is AIQ ETF Truly Benefiting from AI Growth?

Introduction

With Q2 earnings season approaching, investors will soon face a reality check on the AI growth story, which has driven big-tech stocks to all-time highs this year. Funds heavily invested in big-tech have benefited significantly, and one such fund is Global X Artificial Intelligence & Technology ETF (NASDAQ:AIQ). Despite its name, AIQ has not demonstrated any unique AI characteristics in its portfolio.

AIQ ETF Highlight

AIQ is a thematic ETF focusing on AI disruptive technology. It aims to provide price performance based on the AI growth story. According to the ETF’s official site:

The Global X Artificial Intelligence & Technology ETF (AIQ) seeks to invest in companies that potentially stand to benefit from the further development and utilization of artificial intelligence (AI) technology in their products and services, as well as in companies that provide hardware facilitating the use of AI for the analysis of big data.

AIQ has a proprietary weighted strategy called Exposure Score, limiting holdings’ weights at both top and bottom levels. The ETF has 90 total holdings, with the top 10 holdings making up about 37% of the portfolio.

Is AI still a market hype?

In 2023, a poll showed high conviction that AI is real, with only 5% thinking it was overhyped. The stock market in 2024 has shown strong belief in AI growth, evidenced by significant investments in AI infrastructure like GPUs and AI datacenters.

Generative AI, which can create new content from text, image, audio, video, and code inputs, is a key area of growth. However, Gartner projected only a 6.8% increase in IT spending in 2024, which is disappointing compared to the high expectations for tech sector growth.

Is there any “AI alpha” from the AI-focused fund?

AIQ’s weight system limits its exposure to top AI players like MSFT and NVDA. In comparison, other tech-heavy ETFs like IYW and QQQ have higher weights in these companies, making them better AI plays. AIQ has underperformed both IYW and QQQ over the past 12 months and 3 years.

Elevated concentrations make the tech stocks and ETFs AI bubbling.

The major market indices and their tracking ETFs are heavily weighted towards big-tech companies. While technology represents the future, the current concentration levels raise questions about the sustainability of the AI growth story. The upcoming Q2 earnings season could reveal the truth about AI growth, potentially impacting AIQ more severely due to its lower growth metrics compared to the technology sector average.

Closing Thoughts and Comments on Risks

AIQ has not shown unique characteristics from its AI-focused strategy, resulting in lower portfolio weights for top AI players compared to other tech-centric ETFs. Investors may get better performance by replacing AIQ with QQQ or other well-known technology ETFs. However, AIQ remains vulnerable to significant pullbacks if Q2 earnings reveal slowing AI growth. For those who believe in technology’s future, holding AIQ is not a bad idea, but they may leave money on the table in the long run.