2 ETFs For Growth And AI Exposure

Last week in The Juice, we discussed some ETFs we really like: 

Recently, we came across Kurv’s Premium Strategy ETFs that use covered calls to capture growth in big tech stocks at the same time as generating income that it would be difficult for individual investors to, in our opinion, generate on their own. 

These ETFs address the problem of generating income from high-growth tech stocks. We encourage you to take a look. 

In Monday’s Juice, we considered Nvidia (NVDA) in relation to investor exposure at the individual portfolio and ETF level. In that installment, we mentioned WisdomTree, a fund family we like because they publish good information that gets deep into their approach. 

When we like a particular ETF or family of funds, we’ll continue to put them in front of you. 

In today’s Juice, we go back to WisdomTree and take a look at its growth ETF and its artificial intelligence ETF. 

Before we get specific, some basics. 

You can read about the basics in our recent installment on smart beta ETFs. But the long and short of it is that, even if an ETF is passive (as in, it passively tracks a benchmark index), the index it mimics is, often, to some degree, actively constructed. 

In comparing it’s WisdomTree U.S. Quality Growth Index, which is the homegrown, in-house index that the Wisdom U.S. Quality Growth Fund (QGRW) tracks, the fund family made this observation: 

The Nasdaq 100 Index is considered by many as the default benchmark for growth.

The methodology is straightforward—the 100 largest non-financial companies by market cap listed on the Nasdaq Exchange. Securities are weighted by modified market capitalization. 

One of the drawbacks to this simplicity for a growth benchmark is that mature, slow-growth companies can populate the Index because of the absence of fundamental selection criteria.

Fair enough. 

WisdomTree takes a more active approach to index construction. 

QGRW has outperformed the Nasdaq-100 and several other key benchmarks thanks largely to big tech such as NVDA, but also because it has the flexibility to not buy slower growth names and add stocks that don’t fit, in this case, Nasdaq’s criteria:

The WisdomTree U.S. Quality Growth Index underwent its semiannual rebalance this June. During each rebalance, the Index selects the 100 U.S. companies with the highest scores in quality and profitability metrics.

This rebalance saw the addition of pharmaceutical giant Eli Lilly and Company, whose common stock is up 46% this year, at 3.45%.

Eli Lilly has an approximately 2.6% weight in the Russell 1000 Growth Index, but the security is excluded from the Nasdaq 100 Index as its primary listing is on the NYSE, not the Nasdaq.

This is despite the premium sales growth of the company from its wildly successful Mounjaro weight loss drug.

So, while big tech still dominates this WisdomTree index (NVDA, Apple (AAPL) and Microsoft (MSFT) have a combined 32.3% concentration), the index only shares 37 stocks in common with the Nasdaq-100 and has the flexibility to own names such as Eli Lilly (LLY), which, WisdomTree argues, takes a more long-term and comprehensive approach to growth. 

While we like how WisdomTree looks under its own hood in public view, this is less an endorsement and more a way to explain and think about index construction and portfolio weighting. The best investors make rational, well-informed choices when they move away from or add to legacy ETFs such as SPY and QQQ.

To this end, we found the WisdomTree Artificial Intelligence and Innovation Fund (WTAI) intriguing because, while NVDA is the fund’s top holding, it only commands a 3.04% weight. The next 13 stocks (a mix of semiconductors and big tech) have weights of between 2.05% and 2.87% apiece. 

So, the wrinkle here. This more even-handed approach means that WTAI’s recent performance hasn’t been amazing. Unlike QGRW, it hasn’t been propelled by outsized weights in NVDA, MSFT, AAPL and the like. But WisdomTree is okay with this, defending the construction with a long game strategy:

We constantly remind ourselves that the world’s awakening to generative AI was only with the release of ChatGPT in November 2022—even if it feels like it has been around for a long time. That is not even two years of history as we write these words.

Nvidia has done an incredible job to marry the opportunity with its capabilities, but we are only about 20 months into a multi-decade evolution that could dramatically impact our relationship with computers, software and data. The semiconductor space is far more diverse than the premium level AI-accelerator chips (like the Nvidia H100 and B100 GPUs), and we believe in diversification across the ecosystem as opposed to trying to guess which individual firm might be next in line to deliver Nvidia-like results.

This could either go down as the most prudent and rewarding long-term strategy ever or a failure to see that the market gains and subsequent profits are concentrated in the leaders, such as the Magnificent Seven. 

Only time will tell. 

This said, The Juice doesn’t care for the rather extreme position of effectively underweighting stocks such as NVDA. As we have seen with tech high fliers for, oh, the last 20 years, people constantly predict that we’re about to hit the top. Over the long-term, this simply has not happened. While this doesn’t necessarily support going all-in/too overweight on these names, going too light could mean that you’ll miss out on further gains. 

The Juice likes a hybrid between these two ETF approaches that tends closer to the more aggressive, overweight side of things. 

The Bottom Line: The ETF world is packed. In all honesty, you should probably stay away from 98% of the tickers out there. Especially if they get too cute. 

This said, there are some The Juice thinks are worth your time. Sometimes for potential investment. Sometimes for education purposes. Sometimes both. 

We’ll continue to put the information in front of you so you can make informed decisions with your own convictions and concerns in mind. If you think a friend, family member or co-worker would benefit from a free subscription to The Juice, forward them this email and suggest they sign up.

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