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    The Great AI ETF Misadventure: Why Following the Crowd Could Leave You High and Dry

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    “The AI revolution is here, and it’s promising to reshape our world. From self-driving cars to personalized medicine, the possibilities seem endless. But amidst this tech-driven euphoria, a new wave of financial instruments has emerged: AI-themed exchange-traded funds (ETFs). These ETFs offer investors a chance to ride the AI wave, but as we’ve seen with countless other investment fads, following the crowd can sometimes lead to a splashdown. In this article, we’ll dive into the ‘Great AI ETF Misadventure,’ exploring the pitfalls of blindly chasing the next big thing and offering some tips on how to navigate the AI investment landscape without getting burned.”

    TL;DR

    1. Diversification is key. Don’t put all your eggs in one basket.
    2. Timing is everything. Avoid buying at the peak of the hype.
    3. Do your homework. Research the underlying investments in AI ETFs.
    4. Be prepared to pivot. Markets can change rapidly.
    5. Consider alternative investment strategies. Explore other ways to invest in AI, such as individual stocks or sector-specific funds.

    There are plenty of cringe-worthy ways to lose money, but few sting more than watching your investment flop after you correctly predict the market’s next big thing. Enter the tale of woe for some unfortunate investors in three artificial-intelligence-themed exchange-traded funds (ETFs). Yes, you read that right—AI, the darling of the stock market, actually lost them money. Ouch.

    Let’s break it down: These funds, despite being perfectly positioned in the shiny AI landscape, managed to underperform. And, to add insult to injury, this happened at a time when AI is supposed to be on a rocket ship to success. Investors aren’t just feeling a bit let down—they’re utterly baffled.

    So, what’s the moral of this story? Let’s walk through this train wreck together and dive deep into the hazards of thematic ETFs. But don’t worry—I’ll sprinkle in some friendly advice along the way, with just a dash of sarcasm to keep things interesting.

    The AI Fund Flop: A Cautionary Tale

    Let’s have a moment of silence for those poor souls who poured their hard-earned money into AI-themed ETFs this year, only to see them underperform compared to the broader market. The S&P 500? Cruising. The MSCI World? Still doing fine. AI? Well, not so much. And this is before investors started raising eyebrows at AI superstars like Nvidia and Super Micro Computer.

    Why the disappointing returns? Isn’t AI supposed to be the golden child of investing? Well, not so fast. While Nvidia has been enjoying its time in the spotlight, these ETFs somehow managed to miss out on the stock’s meteoric rise. Here’s the kicker: these funds were designed to spread their investments, ensuring they didn’t put all their eggs in one basket. It’s the old diversification strategy—sounds smart, right? Except when your basket is filled with the wrong eggs.

    Take First Trust’s $457 million AI and robotics fund, for example. It has a mere 0.8% of its portfolio in Nvidia. Ouch. Meanwhile, they’ve got more invested in BlackBerry—yes, BlackBerry, the company you probably forgot about after your first smartphone. And then there’s WisdomTree’s $213 million AI fund, which also decided to give Nvidia just 3% of its attention.

    So what’s the lesson here? Sometimes, even with a diversified approach, the strategy can backfire if you’re not betting big enough on the right horse.

    The Temptation of Thematic ETFs: Why They’re Hard to Resist

    The world of ETFs has gotten weirdly specific. Whatever niche you can think of, there’s probably an ETF for it. Want to invest in Californian carbon permits? Sure, they’re down 15% this year, but hey, you never know! How about Chinese cloud computing? It’s down 21%, if you’re into that. Maybe pet care is more your speed—it’s up 10%, in case you were curious.

    But here’s the truth bomb: Thematic ETFs are tricky beasts. You think you’re investing in the future, riding the wave of innovation, but in reality, it’s more like gambling at a casino. Timing is everything, and more often than not, investors end up buying at the peak of hype—right before the bubble bursts.

    Why Even the “Winners” Struggled

    Ironically, Nvidia’s success actually made it harder for some AI-themed funds to beat the market. If you thought ETFs could simply latch onto Nvidia’s coattails and enjoy the ride, think again. Many funds capped their exposure to any one stock to avoid being over-reliant on a single company. Seems reasonable, right?

    Well, this strategy backfired big time. Nvidia now makes up more than 6% of the S&P 500, meaning these ETFs are underexposed to one of the biggest AI success stories. The result? A 20-percentage-point gap between the best and worst AI ETFs this year, with some barely making a dent in Nvidia’s rise.

    If you’re scratching your head, wondering how you could go wrong with an AI fund during an AI boom, you’re not alone. But don’t worry, it gets worse (because of course it does).

    Equal Weight vs. Market-Value Weight: A Battle of ETF Strategies

    Jay Jacobs, head honcho of thematic ETFs at BlackRock, explains that when you’ve got a “winner-takes-all” theme like generative AI, it’s best to be market-value weighted. In other words, the bigger the company (ahem, Nvidia), the bigger the slice of your investment pie should be. Makes sense, right?

    But not everyone agrees. Some funds prefer equal weighting, like Global X’s AIQ, which spreads its bets across a broader range of stocks. By capping its biggest holdings at 3%, it has far less exposure to Nvidia than BOTZ, another AI fund with a cap of 8%. The result? AIQ actually beat BOTZ this year, despite its more conservative approach.

    The takeaway here? Picking a theme is one thing. Picking the right strategy for that theme is a whole different ball game.

    My Take: Investing is Harder Than It Looks (But It Doesn’t Have to Be)

    Let me put this in plain English: If you’re thinking of diving into thematic ETFs, tread carefully. It’s easy to get sucked into the hype, especially when you’re bombarded with flashy fund names that promise to take you to the moon. But as history has shown us, these trends can crash just as quickly as they rise.

    So, here’s my advice:

    1. Do your homework. Don’t just invest in an ETF because the name sounds cool. Look at what it holds, how it’s structured, and whether it actually aligns with your investment goals.
    2. Don’t chase trends. The time to buy into a theme isn’t when everyone’s talking about it. By then, the price has likely been inflated beyond reason. Instead, be patient and look for opportunities when the hype has died down.
    3. Be ready to pivot. Themes come and go, and so do thematic ETFs. Just because you’ve invested in a hot sector doesn’t mean it’ll stay that way forever. Be prepared to make changes to your portfolio when necessary.

    The ETF Graveyard: When Themes Go Bust

    Let’s talk about the thematic ETF graveyard for a minute. Remember the dot-com bubble of the late 1990s? Internet-themed funds were all the rage—until the bubble burst. Many of those funds didn’t live to see the internet truly take off a decade later. More recently, the so-called “metaverse” ETFs that launched after Facebook rebranded to Meta? Six of them have already shut down. Oops.

    And here’s the kicker: The oldest thematic fund, the DWS Science and Technology mutual fund, has been around since 1948, but it’s lagged behind the broader market for decades. Despite golden ages for television, electronics, and tech, this fund just couldn’t keep up. It even has Nvidia in its portfolio now—but guess what? Still underperforming.

    Final Thoughts: Invest with Your Head, Not Your Heart

    The next time you’re tempted to jump on the AI bandwagon, remember: even the smartest algorithms can’t predict the future. While AI ETFs offer exciting opportunities, they also come with significant risks. It’s like trying to catch a falling star—you might get lucky, but the chances are slim. Instead of chasing the next big thing, focus on building a diversified portfolio that can weather any storm. And if you’re still feeling adventurous, why not explore other investment themes that might be less crowded, but just as promising? After all, who says you have to follow the herd to find a treasure?

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    Disclaimer: The views expressed in this article are based on personal interpretation and speculation. This website is not meant to offer and should not be considered as providing political, mental, medical, legal, or any other professional advice. Readers are encouraged to conduct further research and consult professionals regarding any specific issues or concerns addressed herein. All images on this website were generated by Leonardo AI unless stated otherwise.

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