Artificial intelligence is a dominant investment theme, requiring careful evaluation of the theme, investment vehicle, and execution strategy. Funds focused on AI typically invest in large-cap, highly liquid companies with consensus on core holdings. The theme has shown growth potential but faces headwinds like energy consumption and regulation. Thematic funds offer benefits like stock-specific risk diversification and exposure to high-potential segments within the theme.

Two major US funds focused on AI and big data illustrate different approaches: Global X AIQ ETF and Roundhill CHAT ETF. Global X offers stable exposure with a structured implementation but has limitations in transparency and fees. Roundhill takes a high conviction, actively managed approach with flexibility but faces challenges like higher turnover and reliance on manager skill. Each fund has its strengths, highlighting the importance of due diligence before investing.

Proper implementation of thematic funds is critical, considering factors like portfolio fit, overlap risks, growth bias, timing, and behavior. AI funds are best used as tactical or satellite allocations due to their volatility and high-growth nature. Valuation awareness is essential to avoid underperformance and pick entry points strategically based on price/fair value metrics. By efficiently assessing AI funds and deploying them sensibly, financial advisors can deliver value to clients.

Read more at Morningstar: A Handbook to Evaluating Global AI Investments