ETF Prime: Mercer Explores AI ETFs & Opportunities

On this week’s episode of ETF Prime, VettaFi’s senior research analyst Zeno Mercer explores AI ETFs, stepping through new fund launches and investible opportunities. Next, Carolyn McPhillips, president of MFDF, sheds light on the challenges of the ETF share class structure.New AI ETF LaunchesGeraci and Mercer started by discussing the new Dan Ives Wedbush AI Revolution Tech ETF (IVES). Dan Ives, Global Head of Technology Research at Wedbush Securities, has a significant following on Wall Street, Geraci said. The new IVES ETF will hold 30 stocks touching AI in some capacity, which includes software, semiconductors, robotics, robotics, etc.  “Obviously he’s been covering technology for quite some time. He’s very prominent in terms of covering Tesla and Apple and other players like that,” Mercer said. “I definitely think it’s a good move on his part, for sure.” Additionally, Mercer noted the recent launch of the KraneShares Global Humanoid and Embodied Intelligence Index ETF (KOID). KOID’s launch comes at an interesting time as humanoids robots are all-consuming right now, Mercer said. AI ETF Market LandscapeThere are a plethora of options available to investors. However, Mercer doesn’t believe the AI ETF arena has reached the point of oversaturation. There remain diverse approaches.  Research points to potentially over 50% of GDP in 30 years being automated from a technical feasibility, according to Mercer. This growth suggests the industry is still in the early stages, with significant room for more specialized ETFs despite current general options.  Additionally, new ETFs will vary in weighting, philosophy, scoring, and specific focuses, indicating considerable variance between them. For investors looking at allocating to an AI ETF, it’s important to assess which issuers are most trustworthy and knowledgeable in the space. It’s important to consider how the fund is identifying opportunities as well.  Mercer noted methods for identifying AI companies have evolved since the ROBO Global Artificial Intelligence ETF (THNQ C+) launched in 2018. Investor due diligence includes assessing team composition, overlaps, goals, and the tech stack.  A mix of pioneers and challengers in a fund is ideal, Mercer said, as current market leaders may not remain so. The acceleration of AI may cause job losses but will also benefit some companies. Benefits of AI may include improved transportation, services, and elder care, which is a major shift. It is possibly even larger than the arrival of the internet. This opportunity requires significant research and thought regarding sub-sectors and second/third-order effects, such as the current data center boom and what follows.Future of AI Technology and InvestmentsInvesting in emerging technologies like AI, data centers, and cloud security is a compelling opportunity as they become core to products and drive GDP growth. McKinsey projects $7 trillion in AI infrastructure capex by 2030, but the actual tech stack investment could be even larger, according to Mercer. Mercer compared AI technology and investments to the early days of the automobile industry, suggesting significant future growth beyond current market leaders.  Major tech companies are investing heavily in AI-related infrastructure. This includes data centers and technology stacks like analytics, cloud security, and semiconductors, which are becoming core components of products. While mega-caps may face challenges, the companies building the underlying AI tech stack are poised for growth.  Furthermore, interfaces like augmented reality and wearable risk sensors could revolutionize human-technology interaction, Mercer said.ETF Share Class StructureCarolyn McPhillips, president of MFDF, weighed in on the impending approval of a new ETF share class. While fund boards are very familiar with approving different share classes of funds, as mutual fund directors have been doing this for four years, the issues presented with an ETF share class are quite unique, McPhillips said. “I think it will be interesting to see how the board evolves once this DFA application, which everyone appears to be using as a model, gets approved,” McPhillips said. There are three stages of board oversight that are contained in this application as it stands now, according to McPhillips. First, the board must approve the offering of both mutual fund and ETF share classes, determining it’s in the best interest of each class individually and the fund as a whole. Next, ongoing monitoring will track brokerage expenses, cash levels, and capital gains against set thresholds and time periods to identify potential issues.  Finally, annual board approval is required to continue offering the dual share classes. This will be based on advisor-provided information regarding shareholder benefits, conflicts of interest, and any negative consequences to specific share classes, as well as any other information requested. This process will present unique challenges, particularly for mutual fund boards lacking prior ETF experience, McPhillips said.For more ETF Prime podcast episodes, visit our ETF Prime Channel. VettaFi LLC (“VettaFi”) is the index provider for THNQ, for which it receives an index licensing fee. However, THNQ is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of THNQ.