After the launch of DeepSeek’s latest artificial model sent shockwaves through global stock markets, exchange-traded funds (ETFs) focused on artificial intelligence stocks showed significant divergence in performance.
For investors, this underscores the importance of understanding a thematic fund’s strategy.
Investors may not realize it when they initially invest, but funds nominally tracking the same theme can perform very differently. In this case, technological advancements punished some parts of the AI value chain while rewarding others. This represents just one of many twists in the commercialization of a potentially world-changing technology.
How Will DeepSeek Impact AI Thematic Funds?
The sudden emergence of DeepSeek highlights how long-term investors in the AI theme would do well to adopt an investment strategy flexible enough to capture future developments.
Until now, conventional wisdom dictated that the most powerful AI models depended on vast datasets and immense computational power. This favored commercial scale and benefited hardware giants like Nvidia NVDA. However, DeepSeek’s innovations have upended this assumption, triggering declines in the valuations of some of the world’s largest companies. In one day alone, one Nvidia ETF lost 51%.
Specifically, the startup’s new models demonstrate how efficiency gains in AI development can reduce reliance on brute-force computing, significantly lowering computational demands and associated cost. This breakthrough has profound implications for the industry.
Funds Favoring Hardware Fell Hardest
Each thematic fund defines and tracks its theme differently, which can lead to big performance differences.
For the week beginning Jan. 27, the worst-performing Artificial Intelligence & Big Data funds included Franklin Intelligent Machines and Invesco Artificial Intelligence Enablers ETF, which declined by 5% and 4.7%, respectively. Meanwhile, the Morningstar Global Artificial Intelligence & Big Data Consensus Index, which approximates the aggregate positions taken by fund managers tracking the theme, lost 2.2%.
These funds had high exposures (at 41.6% and 33.9%, respectively) to companies in the AI Hardware Industries—this grouping includes companies within the Communication Equipment, Computer Hardware, Semiconductor Equipment & Materials and Semiconductor industries, as defined by Morningstar. The funds include major players like Taiwan Semiconductor Manufacturing Corporation 2330; Advanced Micro Divices AMD; Intel INTC; and Nvidia NVDA. The latter alone lost 19.1% of its value, significantly dragging on fund performance.
Funds Favoring Software Providers and AI Users Outperformed
The top-performing Artificial Intelligence & Big Data funds for the week beginning Jan. 27 included Bellevue AI Health and the L&G Artificial Intelligence ETF, which delivered returns of 4.1% and 3.3%, respectively—outpacing the Morningstar Global Artificial Intelligence & Big Data Consensus Index.
The French-domiciled Bellevue AI Health Fund stands out as an outlier, focusing on companies that leverage AI in the healthcare sector rather than those developing or supporting AI models.
Its largest holdings include well-known healthcare names like Eli Lilly & Co. LLY, whose stock rose 5.8% over that week. By having minimal exposure to traditional AI stocks, the fund avoided the DeepSeek downturn, contributing to its strong performance. While this may be due to its holdings being less affected by broader AI developments, its success also highlights a key trend: as AI advancements reduce costs, the biggest beneficiaries may be the industries that apply AI most effectively rather than those that build it.
Meanwhile, the L&G Artificial Intelligence ETF benefited from its modified weighting strategy, which limits individual stock exposure to no more than 3%. This approach helped cushion the fund from the sharpest losses in AI hardware stocks. Additionally, its overweight position in software companies which stand to gain from the declining cost of AI. This grouping includes companies within the Software—Infrastructure, Software—Application and Internet Retail Industries.
A standout performer was Elastic NV ESTC, a Netherlands-based data analytics company, which gained 8.2% over the week. Specializing in AI-driven big data analytics, Elastic NV is expected to benefit from more efficient and cost-effective AI technologies.
AI ETFs See Inflows Despite Selloff
Despite a broad selloff in high-profile AI stocks, European-domiciled Artificial Intelligence & Big Data funds, which invest in stocks expected to benefit from AI advancements, saw net inflows of €116 million (£96.5 million) in the week beginning Jan. 27. This resilience underscores their role as tactical investment tools. Notably, Xtrackers AI & Big Data ETF attracted steady inflows throughout the week, reflecting continued investor confidence in the sector’s long-term potential.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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