AI-themed ETFs hit top 5 by assets despite Q2 volatility

Wall Street has placed a significant bet on artificial intelligence through exchange-traded funds, according to research from JPMorgan Asset Management. The firm's latest "Guide to ETFs," released this month, ranks AI-themed ETFs as a top five theme by assets under management — even though the group experienced volatility during the second quarter of 2024. Jon Maier, JPMorgan's chief ETF strategist and leader of the insights team behind the report, told CNBC's "ETF Edge" that many investment themes are shifting direction. "Many [themes] are morphing towards AI and the ecosystem surrounding AI," Maier said. He also highlighted a critical overlap between AI-themed ETFs and infrastructure investments. "It's all kind of feeding into the AI story … the applications, the energy [and] the AI models," he explained, suggesting that the AI narrative extends far beyond traditional software and hardware vendors into the energy and infrastructure required to power large-scale AI operations.

At the same time, JPMorgan's research documents a seismic shift in how money flows through the investment ecosystem. Mutual fund inflows are tapering off meaningfully while ETFs are pulling in growing capital. Maier stated that negative inflows into mutual funds have persisted for several years and expects this trend to accelerate. A key reason is tax efficiency. Unlike mutual funds, ETFs typically do not trigger capital gains taxes for their investors — a structural advantage that makes them increasingly attractive to retail investors. Maier illustrated the problem with mutual funds by describing a scenario in which an investor who bought a fund in 2022 and lost 20–40% on their position could still owe a capital gains tax of 6%. "You're not happy," he said, highlighting the perverse incentive created when investors are forced to pay taxes on gains they never realized because the fund manager's trades created taxable events. ETFs avoid this friction, making them a more compelling choice for tax-conscious investors navigating a volatile market.

JPMorgan Asset Management's latest "Guide to ETFs" captures a pivotal shift in how investors are accessing artificial intelligence exposure. The firm's research, released this month, shows that AI-themed ETFs have reached top-five status by assets under management — a striking achievement given the volatility the group absorbed during the second quarter. Jon Maier, JPMorgan's chief ETF strategist, emphasized that many investment themes are now "morphing towards AI and the ecosystem surrounding AI," indicating that exposure to the sector extends beyond pure-play AI software and hardware into infrastructure and energy that support AI operations.

Paralleling this AI surge is a structural shift away from mutual funds and toward ETFs. JPMorgan's data reveals negative inflows into mutual funds overall during the past several years, with Maier predicting this drift will continue. The primary driver is tax efficiency: ETFs typically avoid triggering capital gains taxes on their investors, whereas mutual fund transactions can force investors to realize gains — and pay taxes on them — even when the underlying position is deeply underwater. Maier illustrated the friction using a concrete example: an investor who bought a mutual fund in 2022 and lost 20–40% could still face a 6% capital gains tax bill, creating a perverse incentive to exit mutual funds in favor of ETFs' more efficient tax treatment.

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