Which Is the Better Artificial Intelligence ETF, iShares' IYW or Roundhill's CHAT?

Comparing the iShares U.S. Technology ETF (NYSEMKT:IYW) and Roundhill Investments - Generative AI & Technology ETF (NYSEMKT:CHAT) highlights a choice between a large-scale, diversified index and a high-growth, concentrated thematic strategy.

Investors seeking technology exposure can choose between the traditional approach of IYW or the thematic focus of CHAT. While both funds prioritize software and hardware innovators, they differ significantly in their management styles, concentration levels, and performance profiles within the rapidly evolving artificial intelligence landscape.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year monthly returns. The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

CHAT is significantly more expensive with an expense ratio of 0.75%, nearly double the 0.38% charged by IYW. However, CHAT offers a much higher distribution yield of 2% compared to the 0.10% provided by IYW.

Performance & risk comparison

What's inside

The Roundhill Investments - Generative AI & Technology ETF focuses on the generative artificial intelligence theme, allocating 73% to technology and 19% to communication services. It is an actively managed fund that launched in 2023 and holds 52 positions. Its largest positions include Nvidia (NASDAQ:NVDA) at 6.79%, Alphabet (NASDAQ:GOOGL) at 6.76%, and Advanced Micro Devices (NASDAQ:AMD) at 5.79%. The fund has a trailing-12-month dividend of $1.68 per share and utilizes an ESG screen as part of its investment process.

By contrast, the iShares U.S. Technology ETF tracks a broad index of 139 U.S. tech stocks and launched in 2000. It is more concentrated in its top holdings, which include Nvidia at 16.21%, Apple (NASDAQ:AAPL) at 13.36%, and Alphabet at 7.19%. Its sector exposure includes 81% in technology and 18% in communication services. The fund paid $0.27 per share over the trailing 12 months and operates without specific thematic quirks like ESG screens.

For more guidance on ETF investing, check out the full guide at this link.

What this means for investors

The Roundhill Generative AI & Technology ETF (CHAT) and the iShares U.S. Technology ETF (IYW) offer investors exposure to the hot field of artificial intelligence. How they do so varies significantly, which can influence which fund to invest in.

CHAT targets only companies directly involved in the generative AI sector, the kind of technology popularized by ChatGPT. That’s why the ETF holds a scant 52 positions. This targeted approach has paid off with a spectacular one-year return and higher dividend yield. Its other strength is that it is an actively-managed fund, which is important given how fast the AI market is evolving, although this results in a larger expense ratio.

CHAT’s focus solely on AI stocks means performance can prove volatile. This is illustrated in the ETF’s higher beta and max drawdown. Also, its dividend is distributed only once per year, while IYW pays out quarterly. CHAT is better-suited for investors who want a pure AI fund.

IYW delivers greater diversification with more than double the number of holdings. It provides exposure to AI stocks, such as Nvidia, but also casts a wider net across the tech sector, encompassing companies not known for their AI strengths, such as Apple. This helps to offset downturns in the AI industry.

IYW also offers a lower cost, although that’s to be expected from a passively-managed fund. Because it is less volatile compared to CHAT, IYW is a better choice for conservative investors who want AI exposure with lower risk.

Robert Izquierdo has positions in Advanced Micro Devices, Alphabet, Apple, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Apple, and Nvidia. The Motley Fool has a disclosure policy.