Artificial intelligence (AI) remains one of the most popular investment themes on the market. But if you’re going to invest in a thematic ETF, I think the first consideration should be position sizing. In other words, don’t commit your entire portfolio to it.
For most investors, a $1,000 allocation is a perfectly sensible way to gain exposure, assuming it represents 10% or less of an overall account. Personally, I prefer what is often called the core-and-satellite approach. The core of the portfolio is something broad and diversified, such as an S&P 500 index fund. The satellite positions are where you take more targeted bets.
When it comes to those satellite allocations, I still prefer thematic ETFs over individual stock picking. As flawed as some thematic ETFs can be, they generally provide better diversification and reduce the risk that comes with betting on a single company.
That said, not all AI ETFs are created equal. The category has become crowded, and many funds charge high fees while relying on simplistic screening methods. My preference is to stick with something that is reasonably priced and follows a sensible, forward-looking methodology.
One ETF that has largely flown under the radar is the Xtrackers Artificial Intelligence and Big Data ETF (XAIX). There are quite a few things I like about this AI fund.
What Is XAIX?
XAIX is a passive ETF that tracks the Nasdaq Global Artificial Intelligence and Big Data Index. The important thing to understand is that this ETF is not simply buying companies based on revenue exposure to AI. Many thematic funds use one-dimensional screens that look only at current business activity.
XAIX takes a different approach. The index begins with a universe of more than 1,700 companies worldwide. From there, it applies a proprietary patent-based screening process designed to identify firms actively engaged in AI-related fields. These include deep learning, natural language processing, image and speech recognition, cloud infrastructure, cybersecurity, and big data systems.
A key component is what the index provider calls an intensity score. This evaluates how extensively a company is involved across multiple AI-related technology domains. The goal is to identify businesses that consistently demonstrate meaningful research and development activity and are actively pursuing commercialization opportunities.
In practical terms, the index is attempting to identify future winners based on innovation efforts rather than relying exclusively on trailing revenue figures or historical financial statements. That forward-looking element is one of the more interesting aspects of the methodology.
XAIX Is Also Affordable
One of my biggest complaints about thematic ETFs is cost. It is not uncommon to see AI ETFs charging 0.60%, 0.70%, or even 0.80% annually. Those fees may not sound like much, but they create a meaningful drag on returns over time.
XAIX is considerably more reasonable. The ETF charges a 0.35% expense ratio. Assuming all else is equal, a $10,000 investment would incur approximately $35 per year in fee drag. For a niche thematic ETF, that is fairly competitive pricing.
The fund has also gained meaningful traction since its launch in August 2024. Assets under management have grown to approximately $152 million, reducing concerns about fund viability and closure risk that sometimes accompany newer thematic products.
No AI ETF is guaranteed to outperform. The sector remains volatile, valuations can become stretched, and sentiment can shift quickly. Still, if you’re looking to dedicate a modest portion of your portfolio to AI exposure, XAIX strikes a reasonable balance between cost, diversification, and a methodology that attempts to identify companies actively building the next generation of AI technologies rather than simply benefiting from today’s headlines.
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