Surprise - An AI Fund Where Nvidia Is Not Driving All The 2023 Performance

By Christopher Gannatti, CFA

As investors seek to understand the performance of U.S. equities this year, one of the biggest gaps is between the Nasdaq 100 Index and the S&P 500 Index. For the first five months of 2023:

• The Nasdaq 100 Index delivered a return of 30.64%. Even though it is not called a growth index directly, we appreciate that it includes many of the largest companies that people think of as growth stocks.

• The S&P 500 is more of a core exposure, in that it contains value stocks alongside growth stocks. Since the value style is not doing as well so far in 2023, the overall S&P 500 Index only returned 9.41% over the same period.

Therefore, we’re looking at a difference in performance between the two benchmarks of more than 21%. This tells us, broadly, two things:

1. The first five months of 2023 have been led by growth over value, since that is where the Nasdaq 100’s exposure falls.

2. The first five months of 2023 were not simply led by broad-based growth - they were led by the biggest companies that account for a large exposure in the Nasdaq 100. Otherwise, it would be more difficult to expect a greater-than-21% difference in returns between the two indexes.

Figure 1 allows us to see the companies most directly responsible for these observed results:

• First, the story of Nvidia (NVDA) and its upward shift in expected results has been widely publicized. Nvidia is included in both the Nasdaq 100 and S&P 500 indexes, but it was at an average weight of 4.77% in the Nasdaq and only 1.65% in the S&P 500.

• Another company that delivered an eye-popping strong return in the first five months of 2023 was Meta Platforms (META) - nearly 120%. Because of its higher average weight in the Nasdaq 100, this led to the company contributing nearly 3% to the index’s overall return, compared to less than 1% in the S&P 500.

Figure 1: The Top 10 Companies Driving Returns of S&P 500 and Nasdaq 100 Indexes

Can an AI-Focused Strategy Be More than Nvidia and Some of the Big Names?

One issue with a narrow subset of stocks driving performance of many indexes is that many investors start assuming that every strategy is being driven by those same stocks.

The WisdomTree Artificial Intelligence & Innovation Index, tracked by the WisdomTree Artificial Intelligence & Innovation Fund (WTAI) focuses on four primary areas of the AI ecosystem:

1. Semiconductors: At times termed the ‘picks & shovels,’ semiconductor and semiconductor equipment companies represent the backbone upon which AI models are trained and run.

2. AI software: AI itself is software, which is, ideally, created to perform certain functions and solve certain problems.

3. Other AI hardware: AI systems need to ingest data, which may exist in databases, a more digital format or in the physical world.

4. Innovation: We recognize that we do not know all the ways in which AI will be used and developed, and every time we look across the market, we find what we term ‘innovative use cases.’

The reason it is important to think about these groups is that the way in which the index is run is more focused on weighting the groups and less focused on weighting the individual companies.

The individual companies within the groups typically will be equal-weighted. This means that Nvidia - certainly a member of the semiconductors group - will be weighted the same as the other semiconductor companies.

While during the first five months of 2023 we might have wished that we’d weighted Nvidia more heavily, by the same token, there will come a time in the future when having a massive exposure to this one company could be more of a weight around overall strategy performance.

Figure 2: Allocation of WisdomTree’s AI & Innovation Strategy Across Groups

Bottom Line: A Diverse Foundation of Performance in a Narrow Market

The easy story so far in 2023 has been this: You take Nvidia and you mix it with some of the biggest companies in the world associated with tech and AI and you get the recipe for strong performance.

However, structuring WTAI in the manner that we do, basically equal-weighted across groups, should allow for a more diverse contribution to performance.

Figure 3a: Standardized Performance

Figure 3b: The Top 10 Contributors to WTAI’s Return

The top 10 contributors accounted for only about half of the strategy’s total return in for 2023 so far.

Important Risks Related to this Article

The WisdomTree Artificial Intelligence & Innovation Index is designed to measure the performance of companies primarily involved in artificial intelligence and innovation.

There are risks associated with investing, including the possible loss of principal. The Fund invests in companies primarily involved in the investment theme of artificial intelligence (AI) and innovation. Companies engaged in AI typically face intense competition and potentially rapid product obsolescence. These companies are also heavily dependent on intellectual property rights and may be adversely affected by loss or impairment of those rights. Additionally, AI companies typically invest significant amounts of spending on research and development, and there is no guarantee that the products or services produced by these companies will be successful. Companies that are capitalizing on innovation and developing technologies to displace older technologies or create new markets may not be successful. The Fund invests in the securities included in, or representative of, its Index regardless of their investment merit and the Fund does not attempt to outperform its Index or take defensive positions in declining markets. The composition of the Index is governed by an Index Committee and the Index may not perform as intended. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.

Christopher Gannatti, CFA, Global Head of Research

Christopher Gannatti began at WisdomTree as a Research Analyst in December 2010, working directly with Jeremy Schwartz, CFA®, Director of Research. In January of 2014, he was promoted to Associate Director of Research where he was responsible to lead different groups of analysts and strategists within the broader Research team at WisdomTree. In February of 2018, Christopher was promoted to Head of Research, Europe, where he was based out of WisdomTree’s London office and was responsible for the full WisdomTree research effort within the European market, as well as supporting the UCITs platform globally. In November 2021, Christopher was promoted to Global Head of Research, now responsible for numerous communications on investment strategy globally, particularly in the thematic equity space. Christopher came to WisdomTree from Lord Abbett, where he worked for four and a half years as a Regional Consultant. He received his MBA in Quantitative Finance, Accounting, and Economics from NYU’s Stern School of Business in 2010, and he received his bachelor’s degree from Colgate University in Economics in 2006. Christopher is a holder of the Chartered Financial Analyst Designation.

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