The whole point of the Roundhill Generative AI & Technology ETF (CHAT -1.62%) is to be aligned with the current artificial intelligence (AI) zeitgeist. However, before you invest in this thematic exchange-traded fund (ETF) expecting it to make you a millionaire, you might want to consider how some previous hot themes on Wall Street have played out.
What does the Roundhill Generative AI & Technology ETF do?
The Roundhill Generative AI & Technology ETF is an actively managed fund that invests in exactly what its name suggests. According to its website, “Roundhill believes that generative artificial intelligence will be one of the most impactful technological innovations of the coming decades, driving productivity growth across the global economy.” That might just be true.
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Because it’s actively managed, the ETF really has no set investment approach to describe. Its managers are basically just buying those AI and technology stocks they think are best. As you might expect, its top holding today is Nvidia (NASDAQ: NVDA). But there are other fairly obvious names in the top 10 list, too, including Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOG), and Meta Platforms (NASDAQ: META). There are some less well-known companies in the portfolio, but nothing that would likely shock anyone.
If you are trying to invest broadly in the AI sector, Roundhill Generative AI & Technology ETF is probably a reasonable way to do so. Its expense ratio is a bit high at 0.75%, but that’s not out of line with actively managed funds generally. The ETF has also performed fairly well since its inception in May 2023, rising around 42% versus a gain of roughly 33% for the S&P 500 (^GSPC -1.97%) index. However, it is the very end of the graph below that’s the important bit.
This ETF is hot today, but what about tomorrow?
As noted above, Roundhill Generative AI & Technology ETF is specifically intended to meet a specific market demand — a fund that provides investors with broad exposure to the growth of artificial intelligence. When Wall Street gets a story in its teeth, it often runs with it so far that the story can no longer support the valuations afforded to the stocks that are associated with it. This ETF’s steep drop amid the market’s sell-off in recent weeks highlights the risk here.
But that’s nothing new. Wall Street has a long history of producing investment vehicles based on themes that turn out to be fads. Consider, for example, how the price of iShares Global Clean Energy ETF (NASDAQ: ICLN) took off a few years ago, and then quickly cooled down. Something similar happened with the Global X Autonomous & Electric Vehicles ETF (NASDAQ: DRIV), which surged, then sank, and has since drifted sideways. That’s not a knock on these ETFs: They’re doing what they are designed to do.
The real problems lay in the natures of fickle investors and basic business outcomes. There have been countless investment themes in Wall Street history that were hugely popular one day and totally out of favor the next. Those themes included technology revolutions that we now take for granted, including railroads and internal combustion engine automobiles — things that have become ubiquitous.
This, though, leads to the second point: Not every company that is associated with even a winning investment theme will be a winner. If history is any guide, most companies will end up being also-rans, with just a small number splitting up the lion’s share of the market.
To be fair, Roundhill Generative AI & Technology ETF is actively managed, so it has more flexibility to try to pick the best-positioned companies than an index fund would. But it will be hard for such a focused approach to avoid significant losses if AI doesn’t deliver on the hype.
Could the Roundhill Generative AI & Technology ETF be a millionaire-maker investment?
It is entirely possible that investing in the Roundhill Generative AI & Technology ETF could help you build a million-dollar portfolio. But it is also entirely possible that this is a fad investment that won’t live up to expectations. If you want exposure to AI, it probably wouldn’t hurt to buy this ETF, which provides you with a diversified portfolio of AI stocks in one easy investment. But it would be a bad idea to bet the house on Roundhill Generative AI & Technology ETF given Wall Street’s checkered history with highly focused investment ideas.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
