Evaluating the Performance of AI-Powered ETFs and AI/ML Stocks

Artificial intelligence has become a major focus in finance and trading. It is often portrayed as a transformative technology capable of consistently generating trading profits.

But is this really the case?

Reference [1] takes a critical look at the performance of AI-powered ETFs, AI-focused ETFs, and AI/machine learning (AI/ML) stocks. The authors examine monthly total returns of 21 AI-powered ETFs, 44 AI-focused ETFs, and 42 AI/ML stocks from January 2005 to March 2025. They pointed out,

This study compares the performance of AIPs, AI-focused thematic ETFs, AIML, and broad technology stocks using monthly data from 2005 to 2025. Combining asset-pricing models, volatility estimation, rolling performance measures, quantile regressions, and multivariate panel analysis, we examine how these portfolios differ in return generation, risk-adjusted efficiency, tail behavior, and their association with an investor-attention proxy.

Across methods, a consistent contrast emerges. AIMLs deliver the strongest cumulative performance and the largest standalone abnormal returns; however, they also exhibit substantially higher volatility, deeper drawdowns, and less stable exposure patterns. AIPs, in turn, exhibit lower market exposure, smoother volatility dynamics, and higher Sharpe-type efficiency, positioning them as a stability-oriented channel of exposure to the AI theme...

Overall, this paper shows that AIPs, as an observed investment class, exhibit more efficient risk conversion than comparator portfolios. Their comparative strength is visible in lower beta, smoother volatility dynamics, milder downside deterioration, and higher return per unit of realized volatility. The evidence does not identify a clean causal AI implementation effect or a distinct AI-generated alpha premium. Rather, it shows that AIPs provide a stability-oriented route to AI exposure. In contrast, direct AI/ML equity exposure offers higher upside but is less stable, and AI-focused thematic ETFs occupy an intermediate, more state-sensitive position.

In short, the paper concludes that AI/ML stocks offer the highest upside and abnormal returns but also the greatest volatility and drawdown risk. AI-powered ETFs' main advantage lies in risk reduction, including lower beta, smoother volatility, smaller downside deterioration, and higher returns per unit of realized risk, rather than in a proven causal effect of AI or persistent AI-generated alpha.

One interesting, and important, conclusion is that AI itself is not a direct alpha-generating engine. Instead, it contributes to performance indirectly through improved risk management, volatility targeting, and portfolio construction.

Let us know what you think in the comments below or in the discussion forum.

References

[1] Sovbetov, I., Hatipoglu, Y. Z., & Can, E. N. (2026). Risk-adjusted performance of AI-powered portfolios: Evidence on volatility, beta, and returns. Borsa Istanbul Review.

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