First Trust Bloomberg Artificial Intelligence ETF (FAI): Growth Drivers, Key Risks, and Investor Outlook

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This is for informational purposes only, not investment advice.

Introduction

The First Trust Bloomberg Artificial Intelligence ETF (FAI) is a thematic exchange-traded fund. It is designed to provide exposure to companies involved in artificial intelligence (AI). Including hardware, software, data centers, cloud infrastructure and applications. First Trust issues it. The ETF tracks the Bloomberg Global Artificial Intelligence Select Index using index licensing. This is done with a rules-based methodology.

AI is considered a key structural theme in technology and business transformation. FAI is attractive to investors who want to take advantage of this trend in a diversified way. It remains technology-heavy. This approach is preferred rather than picking individual stocks.

Growth Potential

Structural tailwinds

• The AI theme is supported by paradigm shifts. These include increasing data volumes and advances in algorithms like deep learning, large language models, and generative AI. There is also a proliferation of cloud and edge computing. Semiconductor innovation and enterprise adoption of AI platforms are also important factors.
• The FAI index methodology targets companies whose revenues derive significantly from AI-related activities. According to the fund’s documentation, the universe is screened for AI exposure through “revenue assessment.” It is also assessed through “theme assessment.” After these evaluations, the ~50 best-performing securities globally are selected.
• FAI holds a broad selection of companies contributing to the AI ecosystem, such as hardware, software, and services. This enables investors to participate in multiple layers of the AI value chain. For example, the top holdings include Alphabet Inc. (~7.96 %), Broadcom Inc. (~7.85 %), Amazon.com, Inc. (~7.77 %), Microsoft Corporation (~7.77 %) and NVIDIA Corporation (~7.49 %) as of Oct 23 2025.
• The thematic nature means that if the AI wave continues, companies deeply participating in it may see disproportionate growth. This creates a potential “growth-amplifier” effect for FAI versus broad market indices.
• Some performance data: one source lists a YTD growth of +28.24% for FAI, though given the fund’s recent inception, long-term data is limited.

Rapid innovation and market opportunity

• New AI use-cases keep emerging (e.g. generative AI, autonomous systems, enterprise AI, edge AI) and companies that are key enablers (semiconductors, infrastructure, specialized software) are in many of FAI’s holdings.
• AI is still in many ways an early stage. This is relative to its long-term potential. There is room for upside if adoption accelerates further.

Global and diversified exposure (within theme)

• Although many holdings are U.S.-listed large-cap tech companies, FAI does include companies from outside the U.S., and the methodology is global in scope.
• For an investor who believes in AI as a global secular theme, FAI provides a single vehicle. This eliminates the need to pick many stocks.

Risks and Limitations

Thematic concentration risk

• FAI is diversified across ~50 holdings. However, it is still highly concentrated in one theme (AI) and one sector (Information Technology). This means it carries more risk than a broad market ETF. Indeed, its risk rating is considered “High” by some analysis.
• Thematic funds can underperform if the theme falls out of favour. For example if AI hype moderates, growth slows, regulations bite, or investors rotate away from technology.

Volatility and limited track record

• The fund launched on November 20, 2024. That means its historical performance window is short, which limits the predictive power of past returns.
• The 52-week price range shows a low of ~US 22.92 and a high of ~US 43.84 for FAI, indicating it has already experienced significant price swings.
• Because its holdings are growth-oriented, valuations may be high. If interest rates rise or growth expectations drop, the fund may suffer.

Expense ratio and structural costs

• The expense ratio is 0.65 % according to sources. That is higher than many broad market ETFs, which could eat into returns over time.
• The selection methodology involves screening and thematic assessment. This means the fund may have higher turnover or tracking risk compared to simpler index funds.

Regulatory, competitive and execution risk

• The AI field is competitive and rapidly evolving. New entrants or revolutionary technologies can change market dynamics. A given company’s AI exposure may not translate into future growth.
• Regulatory risks are material: antitrust actions, data/privacy laws, export controls (notably U.S.–China tech tensions) could impact key holdings.
• A thematic label can attract speculative interest. This can increase stock price volatility. It can also impose additional downside risk if sentiment changes.

Liquidity / diversification constraints

• Although FAI holds ~50 stocks, the top holdings dominate (top 10 ~60 % of assets) according to a holdings breakdown. That means performance will be heavily driven by large positions, which reduces true diversification.
• Some holdings may be large-cap tech names, but smaller or international names may have lower liquidity or higher risk.

Investor Outlook and Suitability

Who might FAI be suitable for?

• Investors strongly believe in the medium- to long-term secular growth potential of AI. They prefer a “basket” approach rather than selecting individual tech stocks.
• Investors are willing to accept higher risk and volatility. They are also willing to accept sector and theme-specific exposure. They do this in exchange for potentially higher returns.
• Portfolio allocations where a thematic tilt is warranted (e.g., alongside a broad market core). Using FAI as a satellite allocation (rather than the core) may make sense.

What to watch / tactical considerations

• Valuations: Given most holdings are already large tech names, valuation risk is real. If growth disappoints, the correction may be sharper.
• Rate-sensitivity: Growth stocks and themes often suffer when interest rates rise or when near-term growth expectations weaken.
• Regulatory & geopolitical tailwinds/headwinds: Especially for companies exposed to China, to large–scale data usage, or to advanced semiconductors. These are politically sensitive.
• Theme sustainability: AI hype is strong today. However, whether all companies in the fund translate into material AI revenue may vary. Investors should keep an eye on earnings, guidance and competitive positioning of major holdings.
• Rebalancing & turnover: Because the index is reconstituted quarterly (according to FAI’s documentation), trading costs may be incurred. Turnover can also impact net performance.
• Broad market environment: Thematic funds tend to outperform in strong growth / risk-on markets. In defensive or risk-off conditions they may lag.

Possible scenarios

• Base case: AI continues to gain traction, large-cap tech remains dominant, and FAI participates in this trend. The fund outperforms broad markets modestly.
• Upside scenario: A major technological breakthrough (e.g. generative AI, autonomous systems, massive enterprise adoption) drives strong earnings growth among holdings and FAI significantly outperforms.
• Downside scenario: AI growth slows, valuations get reset, regulatory headwinds mount. FAI may underperform or experience a sharper correction than diversified indices.

Portfolio role & allocation thoughts

• FAI might be allocated 5%-10% of a diversified equity portfolio as a high-conviction thematic bet. This depends on risk tolerance. It should not become a large part of one’s portfolio.
• It should ideally be complemented by a broad market core ETF (e.g. S&P 500, global equities) and perhaps other thematic exposures to avoid over-concentration.
• Investors should consider a long­-term horizon (5-10 years) for a theme like AI. Short-term volatility is likely.
• Because the fund is U.S.-listed, European investors should also check tax/treaty implications. They should consider currency risk (USD vs EUR). Additionally, they need to verify whether the fund is available in their jurisdiction.

Conclusion

FAI offers a compelling way to invest in the AI opportunity. It provides exposure to a global selection of companies tied to the AI ecosystem. These are managed via a rules-based index by a reputable provider. The growth potential is strong, supported by secular trends in computing, data, algorithms, and business transformation.

However, this opportunity comes with significant risks: thematic concentration, high valuations, regulatory uncertainty, and limited historical performance. As such, FAI is best viewed by most investors as a thematic satellite allocation rather than a core portfolio. If you believe in the long-term growth of AI and can tolerate volatility and risk, FAI may be worth considering. But if you prefer stability, income, or broadly diversified exposure, then the thematic nature may make it less suitable.

Any investment in FAI should be aligned with your time horizon. It should also match your risk tolerance and broader portfolio strategy. Do not make investments solely based on advertising.