While the artificial intelligence revolution has propelled markets upward, it might also be contributing to a quiet build of wealth for a few at the expense of the many.
At least, that’s the fear voiced by Larry Fink, CEO of BlackRock, who believes the benefits of AI will flow disproportionately to those who have already invested. In the world of ETFs, this trend is becoming difficult to ignore.
Passive Investments, Winners and Losers
Ever since the introduction of ChatGPT, the performance of AI stocks has been largely driven by a select few mega-cap companies. ETFs focused on the S&P 500, especially those that are weighted by cap, have been pouring money into these same stocks, which have already benefited from the AI trend.
For instance, funds like the SPDR S&P 500 ETF Trust (NYSE:SPY) automatically allocate more capital to companies as their market value rises. This has created a cycle wherein AI leaders gain weight in the index, attract more ETF inflows, and extend their lead. The smaller AI stocks are left lagging behind.
A Case For Staying Invested — Selectively
Yet despite this concentration risk, Fink encourages investors to stay the course, citing the long-run compounding potential of equities. But what does this mean for ETF investors seeking to play the AI theme? It means they need to think more carefully about how they are accessing it.
For instance, broad market funds such as SPY or Invesco QQQ Trust (NASDAQ:QQQ) provide exposure to the companies driving AI innovation in semiconductors and cloud computing. Investing in these funds alone can mean an investor is heavily reliant on a small number of mega-cap technology names.
That’s where diversification strategies come in.
Equal-weighted funds such as Invesco S&P 500 Equal Weight ETF (NYSE:RSP) can provide more diversified exposure to the S&P 500. In contrast, sector-specific funds like VanEck Semiconductor ETF (NASDAQ:SMH) allow investors to play the backbone of the AI revolution without relying on Big Tech platforms.
Broadening Access to AI Gains
A new breed of thematic and actively managed ETFs is also seeking to increase participation in the AI trade, not just by the creators of AI, but by those benefiting from AI in various industries.
This is important, according to Fink, since while technology has the potential to create enormous value, this value is typically concentrated in a handful of companies and investors. Increasing exposure to these companies could help spread this value.
The Balancing Act
While the problem is inequality, the risk is concentration. As more money pours into a select few AI-related titans, the leadership in the market is becoming less and less diverse, making investors highly vulnerable to a reversal in sentiment.
For now, the advice is to stay invested. But in an AI-driven market, where investors stay invested may matter as much as whether they stay invested. The next chapter in the AI trade may be when ETFs either continue to concentrate wealth or spread it evenly.
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