AI-themed ETFs surge in 2025 but pose heightened volatility risks

Artificial intelligence (AI) has emerged as one of the most prominent investment themes this year, driving a substantial influx of assets into thematic exchange-traded funds (ETFs) that enable retail investors to capitalise on major technology trends. However, experts caution that while thematic ETFs linked to AI and other cutting-edge sectors can generate exceptional returns, they are also prone to heightened volatility and risks, which investors must carefully consider.

The Nasdaq’s recent performance illustrates the fragile state of tech stocks, as it flirted with falling below its 50-day moving average for the first time since April and recorded three consecutive losing sessions. Mike Akins, founding partner at ETF research firm ETF Action, highlighted on CNBC that the thematic ETF universe now includes nearly 400 ETFs, covering categories ranging from AI and quantum computing to clean energy and cybersecurity. Intriguingly, the top-performing thematic ETF has surged over 150% year-to-date, yet many others have declined by 10% or more, underscoring the divergent outcomes within this space.

Within the disruptive technology category, AI-themed funds have seen remarkable investor interest, with nearly $20 billion in flows so far in 2025; of this, roughly $15 billion corresponds to ETFs with “AI” explicitly in their names. For instance, the Global X Artificial Intelligence & Technology ETF (AIQ) has attracted around $3 billion in net inflows since January and grown to about $7 billion in assets. Its major holdings include well-known tech giants such as Advanced Micro Devices, Alphabet, Samsung, Tesla, and Alibaba. Similarly, the Global X Robotics & Artificial Intelligence ETF (BOTZ), with assets around $3 billion, focuses on companies like Nvidia, ABB, Fanuc, Intuitive Surgical, and Keyence.

However, Akins stressed the need for investors to conduct thorough research, as performance can vary significantly across AI-focused ETFs, some diverging by as much as 60% in returns this year alone. This tracking error arises partly because thematic ETFs do not simply mimic broad market indexes but concentrate on niche sectors or emerging technologies, amplifying both upside potential and downside risk.

The number of ETFs worldwide is expanding rapidly, crossing over 4,300 U.S.-listed ETFs, now outnumbering the individual stocks traded domestically. This proliferation offers investors more choices but introduces complexity and risk. Some early thematic waves, like cloud computing or next-generation connectivity ETFs, have experienced substantial outflows in recent years, reflecting maturation and integration of those technologies into broader market indexes. Akins noted that the momentum timeline for any theme is difficult to predict, with some rolling out over three to seven years.

Despite recent market jitters, the Nasdaq remains within 5% of all-time highs and has gained close to 250% since its COVID-19 lows. Thematic investing, particularly in AI, represents a promising strategy for investors who comprehend its inherent volatility and maintain a long-term perspective. Quick surges in theme popularity demand opportunistic prizing strategies, taking profits while keeping some exposure remains a prudent approach.

To illustrate the landscape, some of the leading disruptive tech ETFs by assets and returns include:

• First Trust Nasdaq Cybersecurity ETF (CIBR): $11.5 billion in assets, 20% year-to-date (YTD) performance.
• iShares AI Innovation and Technology ETF (BAI): $7.6 billion in assets, 30.5% YTD.
• Global X Artificial Intelligence & Technology ETF (AIQ): $7.2 billion in assets, 33.6% YTD.
• Defiance Quantum ETF (QTUM): $3.2 billion in assets, 37% YTD.
• ARK Next Generation Internet ETF (ARKW): $2.2 billion in assets, leading with a 51.2% YTD return.
• Roundhill Generative AI & Technology ETF (CHAT): $1.1 billion in assets, 55% YTD.

Additional market data from sources like NerdWallet highlight ETFs such as the ARK Autonomous Technology & Robotics ETF (ARKQ) leading with a 72% one-year return and the Spear Alpha ETF (SPRX) posting over 60%, underlining the diversity and rapid growth of AI and related technology ETFs.

Nevertheless, the AI thematic sector has witnessed bouts of sharp declines demonstrating its speculative nature. For example, Reuters reported a severe plunge in AI ETFs in early 2025 following the release of a powerful AI model by Chinese startup DeepSeek, which triggered a 17.3% drop in Nvidia shares and a 34.5% drop in leveraged Nvidia ETFs. Such incidents emphasize the volatility that can accompany AI-focused investments, especially for leveraged or narrowly concentrated funds.

Thematic ETF providers are also innovating. Canadian company Evolve Funds Group launched an AI-powered ETF in 2024 that uses AI algorithms to optimise portfolio construction, blending exposure between tech giants like Nvidia and Microsoft with smaller AI developers, catering to the rising investor appetite for AI-centric products.

In conclusion, thematic ETFs centred on AI and disruptive technologies offer exciting growth opportunities amid rapid technological advancement. However, industry experts consistently recommend that investors approach these funds with an understanding of their unique risks and volatility. Thematic investing can reward patient, well-informed investors who expect some degree of market turbulence but believe in the enduring potential of these transformative technologies over the medium to long term. Taking profits selectively during short-term rallies while maintaining a strategic allocation may prove to be a balanced and effective approach in this evolving market segment.