WTAI: The AI And Innovation ETF Has All The Right Pieces In 2023

The WisdomTree Artificial Intelligence and Innovation Fund ETF (BATS:WTAI) invests in companies involved with AI and related technologies. This market theme has been a hot hand in 2023 with new AI tools like "ChatGPT" breaking through as a global phenomenon.

WTAI is up nearly 30% this year with a portfolio across mega-cap leaders and smaller emerging disrupters, well positioned to benefit from the high-growth opportunities AI is unlocking. We're bullish on tech and see WTAI trading higher over the next year.

What is the WTAI ETF?

WTAI technically tracks the "WisdomTree Artificial Intelligence & Innovation Index" which uses a mix of quantitative and qualitative research within its investment process. The approach is intended to bring together AI stocks that are the best representatives of the theme to create targeted exposure.

The question of what makes an "AI stock" is open to interpretation, crossing the boundaries across sectors. Wisdom Tree considers direct company statements within financial reports, conference calls, news releases, and financial statements to identify companies engaged with artificial intelligence.

A committee of experts from Wisdom Tree groups companies across classifications like "AI Software", "Semiconductors", "Other Hardware", and "Innovation" to select the best representatives.

Criteria here cover global companies with a minimum market capitalization of $100 million along with a trading liquidity threshold. Finally, a modified equal-weighting methodology between classifications is reconstituted and rebalanced twice per year.

What's in the WTAI Portfolio?

The result is a current portfolio of 77 stocks which includes very familiar names like NVIDIA Corporation (NVDA), Advanced Micro Devices (AMD), Microsoft Corporation (MSFT), and Alphabet Inc. (GOOGL) as top holdings.

From there, the equal-weighted methodology ends up adding importance to smaller names within the AI sphere with the average WTAI holding representing about 1% of the fund. A company like C3.ai (AI) has a clear business model related to artificial intelligence while the connection with Lockheed Martin Corporation (LMT) is a smaller part of their operation.

The cumulative exposure of the fund with stocks from various industries is relatively unique and does a good job to capture all the high-level trends in AI, as intended.

WTAI Performance

The launch of WTAI in late 2021 suffered from unfortunate poor timing as it coincided with the peak of the tech bull market cycle, during a period of extreme valuations. Technically, WTAI is still down about 20% from its all-time high.

What's more encouraging is the recent performance including the 28% return thus far in 2023. Beyond the explosive interest in AI as an investing theme this year, tech overall has benefited given improved risk sentiment amid macro shifts like easing inflation and what has been resilient economic conditions.

That being said, WTAI's performance isn't particularly exceptional compared to alternative ETFs, and even the tech benchmark Nasdaq-100 (QQQ) up 31%. Just among ETFs using AI within their fund name, The Global X Robotics & Artificial Intelligence ETF (BOTZ) is up a stronger 33% while its sister fund in the Global X Artificial Intelligence & Tech ETF (AIQ), is right there with a 30% return in 2023.

A big reason for those spreads is based on each fund's exposure to NVDA, which has been the AI outperformer with a 165% gain this year. WTAI's equal-weighted strategy meant that NVDA had a smaller contribution to its performance compared to BOTZ which holds it with a 12% weighting.

We're not suggesting one ETF, or one particular AI strategy is "better" than another. We'll need more data over a longer time frame to identify which strategy delivered alpha. What we can say is that the market dynamics in 2023 have favored the mega-cap leaders. There is a case to be made that in the next phase of the AI stock rally, small-caps could outperform which would favor WTAI's positioning.

One advantage WTAI does have is that its weighing methodology reduces the concentration risk of being overweight a single stock. Investors that already have a fund like QQQ or even hold shares of NVDA, could still benefit from adding WTAI for more targeted AI exposure. It's a balanced allocation approach that has the potential to deliver higher risk-adjusted returns.

Final Thoughts

WTAI is an interesting option for investors seeking targeted exposure to an area of tech that may revolutionize several industries. The only reservation we have in recommending the fund is its small size of just $30 million in assets under management which can add to its volatility. Ultimately, we'll need more time to see whether the WisdomTree AI and Innovation ETF can stand out among several other "AI ETFs" over the long run.

For the rest of 2023, we see more upside for tech and WTAI is well-positioned to continue benefiting from the AI tailwind. A favorable macro backdrop including stabilizing interest rates and ongoing disinflation can help support a higher growth outlook for companies into 2024.

In terms of risks, a deterioration in the global macro outlook would undermine the near-term growth momentum anticipated for AI-related companies. Monitoring points for investors include developments on new AI tools, while headlines related to potential regulatory efforts can lead to volatility.

Add some conviction to your trading! Take a look at our exclusive stock picks. Join a winning team that gets it right. Click here for a two-week free trial.