Roundhill Generative AI & Technology ETF (CHAT -1.36%) is not an index-based exchange-traded fund (ETF). This is important to understand as you look at a thematic ETF that just happens to be built around one of the hottest Wall Street trends today: artificial intelligence (AI).
If you are looking for a millionaire-maker investment, it might seem like AI is the place to be right now, but don't get your hopes up.
What does Roundhill Generative AI & Technology ETF do?
According to Roundhill Generative AI & Technology ETF's prospectus, this exchange-trade fund invests in stocks that "are involved in the investment theme of artificial intelligence ("AI"), focused on generative AI and related technologies." It describes AI as a "computer simulation of human intelligence in computers that are programmed to think and learn like humans." So far there's nothing too shocking there, but the AI sector is very hot today.
Essentially, AI is expected to change the world. It may very well do that, just like the internet did. But the bubble that occurred during the early days of the internet didn't work out as well as expected for all of the stocks that investors jumped into in the hopes of becoming millionaires. For example, Cisco Systems (CSCO -0.62%) still hasn't recovered all of the ground it lost when the dot-com bubble burst.
Jumping on a hot trend can feel great on the way up, but you have to remember that trees don't grow to the sky. Or, if you prefer another Wall Street truism, bull markets have always been followed by bear markets.
So buying Roundhill Generative AI & Technology ETF gets you exposure to a hot trend, for better or worse. But there's another wrinkle here, because the ETF is actively managed.
Roundhill Generative AI & Technology ETF is subject to human error
It seems a bit odd that an ETF meant to track artificial intelligence is built on regular old human intelligence, but that's exactly the case here. A group of humans is picking the best AI stocks to buy. That's a positive in that it allows for dynamic changes to be made as market trends shift. An ETF that follows an index usually has to wait until a specific date to rebalance its portfolio. Having the leeway to act more quickly as situations change could be viewed as a positive.
That said, humans are fallible. There's a whole branch of finance dedicated to the emotional aspects of investing and, more specifically, to the mistakes that investors make time and time again. For example, investors often stick with stocks too long because they are overconfident in their stock-picking ability and frequently only look at information that confirms their opinions. Add on top of this the fact that Roundhill Generative AI & Technology ETF is focused on a narrow slice of the market, and there's not a whole lot of wiggle room for the managers to make changes anyway.
It's also a fairly new ETF with only a little over a year of history, so there isn't much of a track record here to determine how management will perform when times get tough. And times will eventually get tough, as they have in every sector throughout Wall Street history. There was the aforementioned dot-com bust, but investment fads are frequent among investors, including the Nifty Fifty, biotech stocks, and more, going all the way back to the Dutch tulip bulb mania (yes, even flower bulbs ended up being an investment bubble at one point in time).
Probably best to tread with caution
The truth is, Roundhill Generative AI & Technology ETF is in the right place at the right time. But that's exactly why the ETF exists: to attract investors who are looking for a way to invest in AI stocks because AI stocks are hot right now. Sure, it could help make you a millionaire, but buying into hot sectors opens you up to the risk of that sector falling out of favor. If you buy this ETF, you should probably look at it as part of a much broader portfolio. Basically, be cautious and don't back up the truck thinking this one investment will turn you into a millionaire.
