This AI ETF Takes a Different Approach. Investors Are Reaping the Rewards.

Artificial intelligence (AI) is one of the driving forces behind the S&P 500's roughly 80% five-year gain, and enthusiasm remains high. Issuers of exchange-traded funds (ETFs) are meeting demand for broad exposure, packing AI stocks into various easy-to-own funds.

That's led to growth in the dedicated AI ETF universe.Yet, even with all the success of large-cap AI equities, dedicated AI ETFs as a group aren't as large as many investors may believe. This corner of the ETF market holds just $49 billion in assets under management. A possible explanation is that many investors already have substantial AI exposure through S&P 500 ETFs and funds tracking the technology sector. Those products are efficient and often less expensive than dedicated AI ETFs.

From another perspective, AI ETFs need to stand out to captivate investors. The VistaShares Artificial Intelligence Supercycle ETF (NYSEMKT: AIS) does just that. This ETF with $566 million in net assets is about 1.5 years old, and there's plenty to its story.

The VistaShares Artificial Intelligence Supercycle ETF has active management, and it's benefiting investors. Image source: Getty Images.

This ETF is actively managed, and that's a plus

A large percentage of equity-based ETFs, AI and otherwise, on the market today follow index-based strategies, and that's just fine with most investors seeking broad market exposure, because those index funds have expansive lineups and often low fees.

The VistaShares ETF is actively managed and has 61 holdings. When it comes to AI investing, it's potentially advantageous to have the fund do more than just buy the stocks in an index in their index weighting. Look at it this way. Passive AI ETFs must continue buying the biggest megacap names as those stocks rise, regardless of valuation or potential concentration risk. As an active fund, this ETF isn't obligated to follow suit.

Not being constrained by an index is important because the VistaShares ETF can more readily skate to where the puck is going, not where it has been, to quote Wayne Gretzky. That might be one reason why this ETF leans into dynamic random access memory (DRAM) companies, with an 18% combined weight to SK Hynix and Micron Technology, it's top two holdings. My point is, it's not etched in stone that the best AI ETFs are passive products.

This ETF's potential to be more responsive is relevant for another reason. Given that AI is still young, smart investors won't want to be locked into methodologies that reflect what has been or what is. The bigger rewards come from preparing now for what lies ahead. This AI ETF may help achieve that objective.

How the picks are made

In ETF circles, "methodology matters" is an old, though still relevant, phrase, and it applies to this VistaShares fund. By emphasizing the supply chain of the AI trade, the fund managers unearth companies (maybe some hidden gems, too) with legitimate exposure to the them that the ETF addresses. From there, subsectors aren't weighted by market capitalization, but rather by their contributions to AI-related production processes.

That's followed by financial analysis pinpointing companies' economic contributions to various AI themes. Yes, there's an element of "don't try this at home," but thanks to this ETF, investors don't have to.

The VistaShares Artificial Intelligence Supercycle ETF has an annual expense ratio of 0.75%, or $75 on a $10,000 position. That's right at the category average, but there are some actively managed ETFs with higher fees than the VistaShares fund.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology. The Motley Fool has a disclosure policy.