Was the ETF Industry ‘Ahead of Mainstream’ on AI Adoption?

The ETF sector dabbled in AI early, but industry integration is an ongoing process.

Long before the artificial intelligence buzz took over our social media feeds and the fast pace of AI acceleration spooked everyone from entry-level employees to top managers, there were already exchange-traded fund issuers who saw potential in AI: They launched AI-themed funds as well as ETFs that use AI to pick stocks. 

“I think we've seen the ETF ecosystem actually be ahead of the mainstream,” says Rafael Zayas, head of portfolio management and trading at Vident, speaking at the Inside ETFs conference in Hollywood, Florida this week. “There's such fierce competition within the ETF industry for new products, being ahead of the curve, that people are always trying to suss out what could be next.” 

The performance of AI-themed and AI-generated funds has been uneven. While some funds struggled to attract investors, nearly half of all AI funds generated double-digit returns so far this year. 

And despite these AI products being on the market for years, there are still few good AI options. The industry remains in its nascent stage and regulatory obstacles persist. 

Lack of Pure-Play AI Options 

Still, even with these funds that were early to market, there are few options for investors seeking direct exposure to the fast-growing AI industry. AI-driven funds haven’t lived up to their hype in terms of performance to date. 

“There are very few pure plays, and in fact some of those smaller cap pure plays have gotten steamrolled by the Open AI. Everyone's thinking that the smaller players can't compete with open AI at this point,” Zayas noted, speaking at the panel on Sunday hosted by etf.com’s Editor-in-Chief Sean Allocca. “We've seen a very challenging environment for the smaller AI-hyper-focused companies.” 

Eric Balchunas, senior ETF analyst at Bloomberg Intelligence, who was also one of the panelists, agreed there were few pure-play options for investors. 

“This is a really fledgling area where you're not going to probably get a pure-play ETF, so you could even argue that stock-picking a couple AI stocks that are smaller might even be a better decision,” he noted. “As an ETF guy, I rarely say that.” 

Early Adopters 

Some see potential positive impact on the ETF industry as a result of the rise of AI. 

“I think it's going to be tougher for certain active managers to justify those higher fees in the presence of potentially cheaper-to-deploy artificial intelligence managers,” Balchunas added. 

Clearly AI is already transforming how firms do business. Companies like Morningstar are bullish on AI integrations into their research methodology and interactions with customers. The company already launched its own chatbot for navigating its research. 

“We’ve fed every single piece of research ever produced by Morningstar into this chatbot, because there's no way that anyone in this room can memorize every piece of research that is written,” Kunal Kapoor, CEO of Morningstar, said at a separate panel. They’re looking to tackle product data next. “I'm very bullish on the technology precisely because we can go through so much so quickly. There's going to be a lot of evolution of the technology, but I'm incredibly optimistic.” 

Remaining Obstacles 

AI has plenty of skeptics in every industry and the ETF world is no exception. 

For new issuers of AI funds, there is a potential education barrier. 

“Smart beta is an artificial intelligence version of an active manager, so I think AI is going to build on that,” Balchunas said. “But I'm not sure it's a game-changer. I don't see it taking over or anything.” 

He sees AI investing evolving to become a “wing of the smart beta space, and maybe a more advanced area of smart beta.” 

Everything will come down to the performance of these AI funds, including Roundhill’s latest launch. The Generative AI ETF (CHAT). And if these do well, we’ll see a lot more launches this year. And maybe even the AI skeptics will change their minds. 

In the meantime, early adopters and AI enthusiasts like Morningstar’s CEO encouraged financial advisors and others to get to know AI tools better firsthand. 

“Until you go and play around with some of the tools yourself, you're not going to be able to connect with clients—how you think about it, and how you might be able to use it; you’ve got to do that,” Kapoor said. 

Contact Daria Solovieva at [email protected]