BlackRock Launches New AI-Focused ETF: A Concentrated Bet on the Future of Artificial Intelligence

The world’s largest asset manager, BlackRock, is making a **bold move** into the burgeoning artificial intelligence (AI) market with the launch of the iShares AI Innovation & Tech Active ETF (BAI). Headed by Tony Kim, head of the fundamental equities technology group at BlackRock, this actively managed ETF represents a **concentrated, nimble approach** to investing in the rapidly evolving AI landscape, focusing on a select group of companies poised to benefit from the various stages of AI development. Unlike passively managed funds that track broad indices, BAI aims to capitalize on the dynamic nature of the AI sector by actively identifying and investing in emerging leaders across the entire “AI stack.”

Key Takeaways: BlackRock’s AI Play

• **Concentrated Portfolio:** BAI will initially hold a concentrated portfolio of 30-40 stocks, allowing for greater agility in adapting to the fast-paced evolution of the AI industry.
• **Focus on the “AI Stack”:** The fund invests across the entire AI value chain, from underlying technologies like semiconductors and energy sources to applications and AI services.
• **Active Management:** Unlike passive ETFs, BAI utilizes active management to identify and capitalize on emerging opportunities within the AI sector, adapting to market shifts and technological advancements.
• **Beyond the Big Names:** While featuring top players like Nvidia and Microsoft, BAI also includes lesser-known companies like Astera Labs, Coherent Corp., and Hitachi, demonstrating a diverse approach to identifying future leaders in AI.
• **Long-Term Vision:** The fund’s strategy is built on a long-term perspective, reflecting BlackRock’s belief in the sustained growth and transformative potential of AI, going beyond the current market fluctuations.

BlackRock’s “AI Stack” Strategy: A Multi-Layered Approach

Kim’s vision centers on the “**AI stack**,” a layered structure representing the various stages of AI development. At the base lie **fundamental technologies** like semiconductors and energy sources, crucial for powering AI infrastructure. Above this foundation are companies developing **core AI technologies** and, finally, those building **applications and services** that leverage these technologies. BAI’s investment strategy aims to capture value across this entire stack, reflecting the belief that innovation and growth will permeate every layer.

Navigating the AI Market’s Volatility

While the recent market performance of some high-profile AI stocks has experienced some recent slowdown, Kim remains confident in the long-term potential. He emphasizes that the **commitment to AI research and development** is substantial and unwavering, indicating sustained growth despite recent market fluctuations, **”Most of these companies in tech are all racing to get to AGI. We all have different views of AGI and when AGI will happen and what it will cost, but it will cost a lot more. Orders of magnitude more. And not only will it take that much more [money], it will take that much time,”** he stated.

Addressing Valuation Concerns

Concerns regarding the valuations of some AI-related stocks are also addressed by Kim. He highlights that many **leading companies’ valuations are justified** given their significant growth prospects, especially when weighed against the technology sector’s recent underperformance relative to other market segments. This long-term perspective is crucial for understanding the fund’s investment choices.

The Future of AI: Beyond the Current Hype

Kim forecasts that while the **current focus on building AI models** will continue for the next five years, the subsequent phase will center on **monetizing these models** through consumer and enterprise applications. This shift is already evident in products like Apple’s AI assistants and Microsoft’s Copilot. Looking further ahead, even more significant breakthroughs are anticipated by the end of the decade, with the potential for AI to **fundamentally reshape work processes.** The identifying and investing in those companies that become leaders in this next phase of advancements is a key focus of the BAI ETF.

Breaking Free from the “Mag 7”

Kim also warns against a narrow focus on a few dominant tech companies (sometimes referred to as the “Mag 7”). He argues that such a limited approach overlooks the wider range of companies that are pivotal in the AI revolution. **”It’s all changing, and to say that we are locked in — that the Mag 7 is the only source of investing in AI — is, I think, very short-sighted,”** he emphatically stated. This underscores the ETF’s intention to go beyond widely recognized names, finding opportunities within a more diverse set of companies.

BlackRock’s Broader AI Strategy: The iShares Technology Opportunities Active ETF (TEK)

BlackRock is simultaneously launching another actively managed ETF, the iShares Technology Opportunities Active ETF (TEK). While sharing Kim as a manager, TEK takes a **broader approach to technology investing**, encompassing more than just AI-focused companies. This provides investors with diversified choices based on their investment goals and risk tolerance.

Expense Ratios

The BAI ETF carries a net expense ratio of 0.55%, while TEK’s net expense ratio is 0.75%. These figures represent the annual fees charged for managing the ETFs. They should be considered when comparing the ETFs against competitors and making your investment decisions

Conclusion: A Long-Term Vision for AI Investment

BlackRock’s launch of the iShares AI Innovation & Tech Active ETF (BAI) signifies a strategic bet on the long-term growth potential of artificial intelligence. By focusing on the entire AI stack and employing active management, the firm seeks to capture both established and emerging opportunities within this dynamic sector. The launch also showcases BlackRock’s commitment to innovative investment strategies, offering investors varied ways to leverage the potential of this transformative technology.