Heads Up Investors: There's a New Artificial Intelligence (AI) ETF in Town

XAIX: History and Background

You might not realize this as a U.S. investor, but the ETF industry is also rapidly expanding internationally, with the European Union being a significant market center. One of the largest providers ETFs in the EU is Xtrackers by DWS. Building on more than 60 years of experience, DWS has a reputation for excellence in Europe, the Americas and Asia.

In the case of XAIX, Xtrackers has leveraged its substantial history in the EU market to bring this ETF to the U.S. market quickly and effectively.

Unlike most thematic AI ETFs, the EU version of XAIX has a long history, allowing us to see its performance over time. Over the last five years, it has returned an annualized 20.02%. Since its launch on January 29, 2019, it has annualized 18.57%, with its net asset value (NAV) growing 159.26%.

The U.S. version of XAIX that you can invest in is essentially an identical clone, with the exception that it trades in USD instead of European currencies. This provides U.S. investors with access to a well-established AI and Big Data investment strategy with proven historical performance.

XAIX: General Index Guidelines

The first thing to know about XAIX is that, unlike some thematic ETFs, it is a passively managed ETF. Xtrackers has taken great care to keep all-in costs low, and using an index replication strategy allows them to maintain an expense ratio of 0.35%, making it one of the most competitive options.

XAIX tracks the Nasdaq Global Artificial Intelligence and Big Data Index, covering both developed and emerging markets. This index includes companies involved in two primary themes, each with its own sub-themes:

1. AI: This theme covers deep learning, image recognition, natural language processing (NLP), speech recognition, and chatbots.
2. Data Processing and Computing: This theme includes big data, cloud computing, and cybersecurity.

Companies are scored and sorted into these themes by analyzing millions of approved patents filed across global patent offices on a rolling one-year basis. This qualitative analysis works because the number and relevance of patents can indicate a company's commitment and innovation within AI.

Eligible holdings also must meet specific market cap and trading volume requirements, and they must score high enough on ESG risk ratings.

XAIX: Specific Weighting Guidelines

The Nasdaq Global Artificial Intelligence and Big Data Index then ranks eligible stocks based on:

1. Pure Score: This score is the number of patents a company has filed for a particular sub-theme relative to all the other sub-themes for which it has also filed patents. Essentially, it measures how focused a company is on a specific AI or big data sub-theme.
2. Contribution Score: This score is the number of patents a company has filed for a particular sub-theme relative to the total number of patents filed by all companies for that sub-theme. It measures the company's contribution to the innovation in that sub-theme.

Companies are compared on an apples-to-apples basis, meaning large caps are compared to large caps, and small caps are compared to small caps. Those that score below a threshold or have less than 20% foreign ownership been omitted. The remaining companies are divided into two pools:

1. Primary Subsectors: This includes companies from electronic equipment, consumer services, media agencies, telecommunications services, computer services, consumer digital services, software, computer hardware, semiconductors, and telecommunications equipment.
2. Wildcard Securities: These are companies from other industries like financials or healthcare that are leveraging or deploying AI technologies.

Once the selection is complete, the index is weighted by the modified float-adjusted market capitalization of the companies. No single index security weight exceeds 4.5% at each semi-annual rebalancing, which prevents the ETF from becoming excessively top-heavy.

XAIX: Portfolio Details

Finally, here's a look at XAIX's portfolio in terms of country allocation, sector weightings, and top holdings (as of August 31ˢᵗ, 2024):

Despite recent volatility across the AI sector, the fundamental investment thesis remains intact. The transformative potential of artificial intelligence continues to offer compelling opportunities for growth.

For investors looking to position their portfolios on the leading edge of technological innovation, staying the course with AI-focused investments could be a strategic move.

As with any emerging technology, patience and a long-term perspective are key to navigating the ups and downs while capitalizing on the advances that lie ahead.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.