Exchange-traded funds (ETFs) offer a convenient way for investors to gain exposure to a diversified portfolio of stocks. Some ETFs track broad market indexes, while others focus on specific sectors like artificial intelligence (AI). The Roundhill Generative AI and Technology ETF (CHAT) is one such fund, offering investors a targeted approach to the burgeoning AI market. This ETF holds a concentrated selection of companies driving advancements in AI platforms, infrastructure, and software.
What is the Roundhill Generative AI and Technology ETF?
This actively managed ETF holds a relatively small portfolio of 52 stocks. The team at Roundhill selects these stocks based on their potential for generating strong returns and their importance within the AI industry. With its specialized focus, the fund has an expense ratio of 0.75%, which is significantly higher than passive index funds. For example, the Vanguard S&P 500 ETF boasts an expense ratio of just 0.03%.
While the higher expense ratio can impact returns, the benefit lies in the convenience of a carefully curated portfolio of leading AI stocks without requiring investors to conduct extensive research independently.
Key Holdings and Their Significance
The top five holdings in the Roundhill ETF constitute a substantial 26% of the fund’s total value. These companies represent some of the most influential players in the AI landscape:
- Nvidia: The leading supplier of advanced graphics processing units (GPUs) crucial for data centers, essential for AI development. The demand for its latest Blackwell range of GPUs is expected to surpass supply for the foreseeable future. Nvidia also aims to dominate the autonomous driving and robotics segments of the AI industry.
- Alphabet: Through companies like Google, Alphabet has launched the Gemini chatbot and operates extensive cloud computing platforms offering essential infrastructure and large language models (LLMs) for AI software development.
- Microsoft: Microsoft has also launched its own AI chatbot, Copilot, and operates large cloud computing platforms that provide developers with the data center infrastructure and LLMs they need to build their own AI software.
- Meta Platforms: Meta entered the chatbot arena with Meta AI, integrated into its social media apps. The company’s Llama family of LLMs, an open-source favorite, currently powers it. Meta is also working on the more advanced Llama 4 model.
- Palantir Technologies: Palantir experienced significant growth last year, fueled by the surging demand for its AI-powered software platforms. These platforms help businesses and governments derive more value from their data.
Beyond its top holdings, the Roundhill ETF includes other prominent AI stocks, such as Oracle, Broadcom, Apple, Amazon, and Advanced Micro Devices.
Potential for Market-Beating Returns
Established in May 2023, the Roundhill ETF has a limited performance history. However, it delivered a 30.9% return in 2024, outperforming the S&P 500’s 23.3% gain. This outperformance was partly driven by the top five holdings, which produced an average return nearing 125%.
If the major AI companies continue to deliver strong revenue and earnings growth, the ETF is poised for continued success. Roundhill projects that AI could contribute $7 trillion to the global economy by 2032, a large portion of that value being driven by companies like Nvidia, Alphabet, and Microsoft. The potential of this sector is significant.
However, it is important for investors to diversify their portfolios. A diversified approach can protect against significant financial setbacks if the AI sector fails to entirely meet expectations. By allocating only a portion of investments to the Roundhill ETF and the rest to a diverse group of funds and/or individual stocks, investors can position themselves for longer-term growth.
Consider the following. An earlier investor who invested equally in a S&P 500 ETF and the Roundhill ETF in 2024 earned higher returns than if they invested in only the S&P 500. While past performance doesn’t guarantee future results, this trend is a positive indicator.
The rapid evolution of AI is expected to have an impact on businesses and consumers that rivals that of the internet and smartphones. The Roundhill ETF presents an accessible way for investors to capitalize on the potential of this significant technological transformation.
