AI ETFs Surge in Popularity Despite Q2 Volatility, JPMorgan Report Reveals

Despite a challenging second quarter marked by market volatility, exchange-traded funds (ETFs) focused on artificial intelligence (AI) have seen a remarkable surge in investor interest, positioning AI as a top five investment theme by assets under management, according to a recent report by J.P. Morgan Asset Management.

The firm's "Guide to ETFs," released this month, highlights the growing gravitational pull of AI-related investments. "Many [themes] are morphing towards AI and the ecosystem surrounding AI," Jon Maier, chief ETF strategist at J.P. Morgan Asset Management, commented on CNBC's "ETF Edge" this week. This trend indicates a significant investor pivot towards AI and its associated infrastructure, applications, and energy demands.

Maier, who led the insights team behind the report, emphasized the interconnectedness of AI-themed ETFs with infrastructure investments. He noted that the AI narrative is increasingly encompassing elements such as applications, energy consumption, and the development of AI models themselves, suggesting a holistic investment approach to the AI revolution.

ETFs Outpace Mutual Funds Amid Shifting Investor Preferences

Beyond the AI trend, the J.P. Morgan report also sheds light on a broader shift in investment vehicle preferences. The study found that while overall inflows into mutual funds are noticeably tapering off, ETFs are attracting a more substantial share of investor capital.

"That's only going to continue," Maier predicted, citing data showing consistent negative inflows into mutual funds over the past several years. This trend underscores a growing preference for the flexibility and accessibility that ETFs offer.

Maier further suggested that ETFs have become increasingly appealing to retail investors, largely due to their inherent tax advantages. "They typically don't pay a capital gain [tax]," he explained, contrasting this with the tax implications of mutual funds.

He elaborated on the tax disadvantages of mutual funds, particularly when investors experience market downturns. "Imagine if you bought a mutual fund in 2022 and you're down 20%, 30%, 40%, depending on on what part of the market you bought, and you still got a capital gain of 6%. You're not happy," Maier stated, highlighting a scenario where mutual fund investors can incur capital gains taxes even on declining investments.