Investors are beginning to recognize the potential of leading artificial intelligence (AI) companies but are unsure how to invest in the current environment after a meteoric rise in valuations of hardware suppliers and big tech companies such as the “Magnificent 7” companies (Tesla, Amazon, Alphabet, Apple, Nvidia, Meta, and Microsoft).

This is where the KraneShares Artificial Intelligence & Technology ETF (Ticker: AGIX) comes in. AGIX goes beyond Nvidia and the rest of the "Magnificent 7" to capture value across AI hardware, infrastructure, and applications. It will also dynamically progress across these themes as the industry evolves.

Just the Beginning

Although Nvidia has propelled the semiconductor hardware sector into a frenzy, this is only the first stage of AI development. Trillions of dollars are invested to build the data centers for AI model training and inference. AI-ready hardware companies are capturing these massive investments. For example, Arista Networks, a leader in building scalable high-performance and ultra-low-latency networks for AI-ready data centers, has nearly tripled its earnings over the past two years.

The development of AI infrastructure is progressing rapidly. Cloud service providers like Microsoft Azure, Amazon AWS, and Google Cloud are serving as the essential computing platforms for hosting and running AI models at scale. Beyond the major cloud platforms, there has been a proliferation of other specialized infrastructure services catering to the needs of the broader AI technology stack, including tools and solutions for data processing, model training, deployment, and monitoring. One example is Datadog, which provides monitoring and observability solutions across the AI stack and has doubled revenues over the last two years.

We are beginning to see some early signs of revenue impact for applications that represent the last stage. In Q2 2024, ServiceNow's Now Assist net new ACV (annual contract value) doubled quarter-over-quarter, becoming the "fastest growing new product in the company's history." Now Assist uses domain-specific AI models to automate and enhance processes across ServiceNow's workflow products. ServiceNow provides a cloud-based platform that enables enterprises to digitize and automate their workflows and operations across IT, HR, customer service, and other business functions.

As such, we are in the early innings of AI becoming fully integrated into the economy. This is why AGIX is designed to progress along these areas as the ecosystem develops.

A Pure Play, Entire Ecosystem Approach

With each technological paradigm shift, a new investment framework becomes necessary. This was evident in previous transitions such as that from mobile internet to cloud computing. Now, we are transitioning from traditional search engines and other non-intelligent tools to AI. Looking at previous technological revolutions, it appears likely that the widespread adoption of AI technology may also bring changes to business models and cost structures as it drives down the cost of scanning through data and content creation.

Hardware companies like Nvidia have posted impressive returns compared to the broader market. Nvidia alone has gained 677% since the start of 2021.¹ However, concentrating AI exposure in one stock not only ignores the rest of today's ecosystem but also exposes investors to the risk that the company loses its leadership position in a rapidly evolving market or that growth shifts to the next link in the value chain.

As such, we believe a pure play, ecosystem approach may produce superior risk-adjusted returns over the long term. We also anticipate the industry’s focus to move from hardware to infrastructure to application in that order and adjusting the portfolio accordingly may also drive returns over the long run.

AGIX also filters out companies with insignificant expected revenues from AI, ensuring the portfolio always aligns with the theme. Other AI-related indexes, by contrast, tend to include companies with little AI exposure.

How it Works: AI Scoring

The AGIX Index, the Solactive Etna Artificial General Intelligence Index, uses a holistic framework to assess a company’s AI exposure. It assigns companies two scores to assess their AI potential and competitive positioning: AI Relevance and AI Readiness.

AI Relevance: AI Relevance assesses how integrated AI is within a company's current operations. Companies with high relevance, such as Nvidia (NVDA) and Taiwan Semiconductor Manufacturing (TSMC), are direct beneficiaries of the AI wave, providing essential hardware for AI development.

AI Readiness: AI Readiness measures the potential business impact and revenue that AI integration could bring. Companies investing in AI-driven product lines to secure future market value include Apple, Adobe, and ServiceNow.

Companies must have a minimum score for readiness and relevance or a high enough score in one. Based on these scores, companies are then plotted on a matrix, which sorts them into Beginners, Adopters, Enablers, and Leaders. Companies with the best overall scores are considered for inclusion in the fund.

Conclusion

The AI craze has propelled the valuations of a handful of stocks over the past two years. Rather than using the Magnificent 7 as a standard bearer for the AI space, investors may wish to consider a more diversified* and dynamic approach. The KraneShares Artificial Intelligence & Technology ETF (Ticker: AGIX) goes beyond Nvidia to capture value across hardware, infrastructure, and applications. It will also dynamically adjust between these themes as the industry evolves.

If you would like to download our in-depth white paper covering the AI ecosystem and investment opportunity, please click here.

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For AGIX standard performance, top 10 holdings, risks, and other fund information, please click here.

*Diversification does not ensure a profit or guarantee against a loss.

1. Data from Bloomberg as of 8/2/2024.

Term Definitions:

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): Financial metric that represents the operational profitability of a company

Compound Annual Growth Rate (CAGR): Mean annual growth rate of an investment over a period longer than one year.

Index Definitions:

NASDAQ-100  Index: The Nasdaq 100 is an index that tracks the performance of 100 of the largest and most actively trades stocks on the Nasdaq exchange.

Indxx Artificial Intelligence & Big Data Index (IAIQ Index): The Indxx Artificial Intelligence & Big Data Index is designed to track the performance of companies listed or incorporated in developed markets that are positioned to benefit from the development and utilization of Artificial Intelligence (“AI”) technology in their products and services, as well as companies that produce hardware used in Artificial Intelligence applied for the analysis of Big Data. The index intends to reflect the performance of companies engaged in applications of AI including but not limited to: AI developers, AI-as-a service(“AIaaS”), AI hardware, and quantum computing.

Solactive Etna Artificial General Intelligence Index: captures the performance of companies engaged in developing and applying artificial intelligence technologies.