The recent earning smash by NVIDIA (NVDA) has taken the investing world by storm. ChatGPT and other AI applications have exploded in popularity over the last 3 months as people have rushed to utilize these new tools. This has led to a big boost in large corporations rushing to add capacity for the potentially massive productivity gains. The WisdomTree Artificial Intelligence ETF (BATS:WTAI) is looking to have a concentrated ETF directed at those looking for bleeding edge companies in software and AI focused hardware. This means the ETF has both those that build AI applications and features as well as the quite profitable semiconductor companies surrounding them.
The ETF provides a dual pronged approach for a reasonable 0.45% MER, removing all of the non-AI related companies you would get buying QQQ or the wider market. The ETF holds 75 components and isn’t heavily weighted to any one name – ideal for someone looking for a diverse way to play the artificial intelligence theme. While not equally weighted the top names are around 2.5% of the fund. It trades at a forward P/E of 36.4, way ahead of the wider tech or US indexes but to be expected considering its high long term revenue and earnings growth. Those investing in WTAI need to prepare for volatility but long term has the potential to greatly beat the wider market. The ETF focuses primarily on large cap with 63% of household names, but does have a solid portion of mid (22%) and smaller (15%) cap companies as well.
Top 10 Holdings (WisdomTree Website)
Dual pronged approach
The ETF tracks WisdomTree’s artificial intelligent & innovation index – which has 75 components and spans the bleeding edge sectors. The majority of the ETF is focused on two sectors – Semiconductors on one side and Software on the other. Both make up around 35% of the ETF with communications giants like META and GOOG also with sizable positions. Companies like NVIDIA, AMD and Taiwan Semiconductor are essential as the new data centers built for AI which require immense computing power. One trillion dollars of data centers will be moving from CPU to GPU power over 10 years as pointed out by NVDA CEO Jensen Huang on their recent Q1 call. GPU (graphics processing unit) powered datacenters will be standard in 10 years according to NVDA as AI requires a large boost in compute power. Semiconductors have a number of different areas such as equipment manufacturers and different chip styles – all with importance in the supply chain that powers AI. These ‘pick and shovel’ companies in the equipment space are especially important as new facilities are ramped to meet huge demand from the major players. ASML is example of a completely unique asset in the equipment space providing its unique lithography product necessary for next generation semi production. To power the futures large language models and deep learning, we will need continued innovation in the Semiconductor space making it a must for anyone wanting to play AI.
On the software side, many of the biggest and fastest growing software companies are utilizing AI now or planning to in the future to maximize profits. Companies in this area have seen a boost like C3.aI (AI) and UiPath (PATH) in recent weeks as traders look for short term winners. Giants like Microsoft, as well as recent upstarts like Alteryx, Twilio and CrowdStrike are present which plan on utilizing AI to enhance their already fast ramping product suites. Microsoft in particular is known to be enhancing its search engine Bing with ChatGPT and made a sizable investment in them, showing they are serious about AI long term. Google and Meta both have their own plans with a major AI arms race among the FANG names in full swing. These software companies range from profitable to those that burn cash at a decent clip, meaning if interest rates continue higher it would be an overall drag on ETF performance. They underperformed significantly in 2022, but have found a bottom with multiples compressed below 10+ year averages. From here they seem to be able to outperform again as long as the risk on environment continues.
As you can see above recently the market has been moving fast towards AI, with the WTAI ETF beating the QQQ significantly over the past month. Technically, the technology sector has broken out as the market looks toward the end of the interest rate hiking cycle. As a result, compared to the wider US S&P 500, WTAI has almost had 3x the return year to date. Forward returns against the index are less clear, but the heavy focus on semiconductors and software mean those two sectors will decide the direction.
Conclusion
The WisdomTree Artificial Intelligence ETF is a fairly priced way to play a focused AI theme. The ETF is unique in that it is heavy in the highest growth companies in both the software and semiconductor space. Both of these spaces have been strong compounders in the past 10 years with cloud and AI giving them potential outperformance for the 2020s. Volatility will be high, as unprofitable companies will move heavily with the market and semiconductors are very cyclical. However, those wanting to avoid single stock risk with an Nvidia, AMD or Taiwan Semiconductor would do well buying WTAI as a core long term holding.
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