How AI Thematic Funds Are Structured
AI-themed ETFs are among the most talked-about financial products of 2025.
From Wall Street to fintech brokers, everyone seems to be launching an “AI-first” fund — promising exposure to the next great technological revolution.
But how much of it is real innovation, and how much is just marketing hype?
In this article, we break down the truth behind AI-first ETFs: how they work, what’s inside them, and the key red flags every investor should understand before buying in.
1. What Are AI-First ETFs?
An AI-first ETF is a thematic exchange-traded fund that focuses on companies developing or using artificial intelligence technologies.
They usually track custom indexes built around:
- AI hardware (e.g., semiconductors, GPUs)
- AI software (machine learning, NLP, automation)
- AI services and data infrastructure
Examples (2025):
- Global X Robotics & Artificial Intelligence ETF (BOTZ)
- iShares Robotics and AI Multisector ETF (IRBO)
- WisdomTree Artificial Intelligence UCITS ETF (WTAI)
- Roundhill Generative AI ETF (CHAT)
These funds let investors gain diversified exposure to the AI trend — without having to pick individual winners.
2. The Opportunity: Why Investors Are Flocking to AI ETFs
a. Explosive Industry Growth
According to IDC, global AI spending surpassed $500 billion in 2025, driven by chip demand, LLM models, and enterprise automation. ETFs allow investors to tap into that macro trend efficiently.
b. Diversification in a High-Volatility Sector
Instead of betting everything on NVIDIA or Microsoft, ETFs spread risk across multiple AI-related stocks, including mid-caps and emerging innovators.
c. Easy Access to a Complex Theme
AI investing requires technical knowledge. ETFs simplify it: one trade, one ticker, and automatic rebalancing.
d. Institutional Adoption
Pension funds and family offices are beginning to allocate small percentages to AI-thematic ETFs as “innovation exposure” alongside tech and ESG.
3. What’s Actually Inside an AI ETF
Many investors assume all holdings are pure AI players — but that’s rarely true.
A typical AI ETF in 2025 holds a mix of:
- Hardware leaders: NVIDIA, AMD, ASML
- Cloud & infrastructure giants: Microsoft, Amazon, Google
- Software innovators: Palantir, ServiceNow, UiPath
- Automation & robotics: ABB, Fanuc, Intuitive Surgical
- AI-adjacent names: Apple, Meta, Tesla (partial AI exposure)
👉 Key insight:
Most AI ETFs are broad tech funds with an AI narrative. Only a few allocate primarily to companies where AI is the core business model, not a side product.
4. The Performance Reality (2020–2025)
While the AI theme has outperformed the broader market, the returns have been uneven:
| Period | AI ETF Basket (avg) | S&P 500 | Nasdaq 100 |
|---|---|---|---|
| 2020–2023 | +45% | +32% | +40% |
| 2024 | +78% | +28% | +54% |
| 2025 (YTD) | +12% | +6% | +10% |
Performance has been driven mainly by a handful of mega-caps — especially NVIDIA, Microsoft, and Alphabet. Smaller AI stocks have lagged or remained volatile.
5. The Red Flags: What Most Investors Miss
a. Loose Definitions of “AI Company”
Many ETFs include firms with minimal AI exposure — a red flag known as “AI-washing.”
Always read the index methodology and check what percentage of revenue comes from AI products.
b. Concentration Risk
Top 10 holdings often represent 40–60% of total assets, limiting diversification benefits.
c. High Expense Ratios
AI-thematic ETFs often charge 0.65–0.80%, far above traditional broad-market ETFs (~0.05–0.10%). Fees eat into long-term returns.
d. Over-reliance on Big Tech
The “AI” theme frequently mirrors the Nasdaq 100. If Big Tech corrects, AI ETFs follow.
e. Hype Cycles and Timing Risk
Like blockchain ETFs in 2018, AI ETFs risk over-valuation when hype peaks. Momentum can fade quickly.
6. How to Evaluate an AI-First ETF Before Buying
Here’s a quick due-diligence checklist every investor should follow:
✅ Check the Index Construction
- Who built it (e.g., Nasdaq, Solactive, proprietary)?
- How often is it rebalanced?
- Are inclusion criteria transparent?
✅ Inspect the Top 10 Holdings
- Are they true AI companies or just large tech firms?
- Is there sector or geographic concentration?
✅ Compare Expense Ratios
Lower fees compound significantly over time.
✅ Look at Revenue Exposure
Prioritize ETFs where at least 50% of holdings generate meaningful revenue from AI-related activities.
✅ Assess Liquidity
Avoid small ETFs (<$50M AUM) with low daily volume — spreads can be wide.
7. The Smart Way to Use AI ETFs in a Portfolio
AI ETFs shouldn’t replace core holdings — they should complement them.
a. Tactical Allocation (5–15%)
Treat AI ETFs as a satellite position — high growth potential, but high volatility.
b. Diversify Across Sub-Themes
Combine AI ETFs from different niches:
- AI Infrastructure (semiconductors)
- AI Software / SaaS
- Robotics & Automation
- Generative AI
c. Rebalance Periodically
Trim exposure after strong rallies to lock in gains and reduce drawdown risk.
d. Combine with Active Strategies
Pair thematic ETFs with active funds or direct AI stock picks for better alpha capture.
8. Future Outlook: Next-Gen “Active AI ETFs”
By late 2025, we’re seeing the rise of AI-driven ETFs — funds where algorithms actively select and weight holdings in real time.
These second-generation ETFs promise:
- Real-time rebalancing based on machine learning signals
- Dynamic sector rotation
- Sentiment-aware exposure
However, transparency remains limited, and regulation (EU AI Act, SEC guidance) is still evolving.
Until frameworks mature, investors should treat “AI-managed ETFs” as experimental products.
9. Key Takeaways
✅ AI ETFs = Easy exposure + hidden complexity
✅ Diversify themes and monitor top holdings
✅ Don’t overpay for hype — read the methodology
✅ AI-driven ETFs are exciting, but untested
✅ Combine thematic exposure with solid risk management
10. Bottom Line
Artificial intelligence is reshaping industries, and AI-first ETFs are an efficient gateway into that revolution.
Yet investors must separate the narrative from the numbers.
By analyzing holdings, costs, and index methodology, you can spot genuine innovation — and avoid the traps of over-marketed funds.