Roundhill launches ‘Generative AI’ thematic ETF

May 24th, 2023 | By | Category: Equities

Roundhill Investments has rolled out a new actively managed thematic equity ETF targeting companies at the forefront of artificial intelligence technology with a focus on generative AI.

Dave Mazza, Chief Strategy Officer at Roundhill Investments

Dave Mazza, Chief Strategy Officer at Roundhill Investments.

The Roundhill Generative AI & Technology ETF (CHAT US) has been listed on NYSE Arca with an expense ratio of 0.75%.

Artificial intelligence is an established megatrend that is proving to have a sizable influence within a wide range of applications including self-driving cars, speech recognition, image recognition, natural language understanding, decision-making, and many more.

Goldman Sachs research suggests artificial intelligence could drive $7 trillion in global economic growth over the next seven years as a result of accelerated productivity growth.

Generative AI, meanwhile, is a relatively new type of artificial intelligence technology that uses neural networks to generate new data that is similar in structure and format to existing data.

Unlike other AI techniques that use existing data to make predictions or classifications, generative AI can create entirely new data that is original and unique. This is accomplished through the use of complex algorithms that learn to recognize patterns and relationships within large datasets.

According to Roundhill, generative AI is beginning to have a significant real-world impact. OpenAI’s ChatGPT has become the fastest application ever to reach 100 million users, and its customers are already integrating its technology for diverse tasks from creative writing to coding software.

Roundhill’s proprietary research assigns a total addressable market size of approximately $120 billion to enterprise generative AI software.

Dave Mazza, Chief Strategy Officer at Roundhill Investments, commented: “Generative AI represents the next frontier of artificial intelligence technology, offering the potential to revolutionize industries such as entertainment, healthcare, and more.

“We had been hearing from investors for months that they were interested in investing in generative AI, but were frustrated by the lack of ETF options available to them. Roundhill is excited to be able to meet market demand with CHAT, an ETF comprised of the companies pioneering what we believe to be one of the fastest growing technologies in history.”

Investment strategy

The ETF invests in companies listed worldwide, including those in emerging markets, selecting firms with market capitalizations of at least $250 million and average daily trading volumes greater than $500,000.

Potential constituents are screened for relevance to the growth of generative AI. Roundhill assigns firms with a proprietary ‘Exposure Score’ (from 1 to 100) which is based on a transcript score and sector score.

The transcript score utilizes proprietary keyword analysis from publicly available documents to identify references to various AI and related technology terms.

The sector score, meanwhile, assesses the materiality of generative AI and related technologies to the company’s expected financial performance. Companies that are expected to derive at least 50% of their revenue and profits from AI software, cloud infrastructure, semiconductors, network infrastructure, and related services, as well as firms that are expected to invest more than 50% of their R&D budget in these areas, receive the highest scores.

The fund currently contains 30 constituents with its largest holdings being Nvidia (7.8%), Microsoft (7.6%) Alphabet (7.2%), Baidu (5.4%), iFLYTEK (5.0%), Adobe (4.9%), AMD (4.9%), SenseTime Group (4.7%), C3.ai (4.5%), and Salesforce (3.6%).

Stocks from the US account for two-thirds (68.7%) of the portfolio’s exposure with Chinese companies making up another quarter (24.3%). The next-largest country exposure is Japan at just 2.6%.

The strategy’s thematic relevance breakdown currently includes a 50% allocation to platforms, 22% to enterprise software, 18% to infrastructure, and 9% to consumer software.

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