November 2025 has exposed a structural flaw in AI investing: ETFs promise diversification but often deliver concentrated risk disguised as portfolio breadth.

Leading semiconductor ETFs now carry 20-25% exposure to single companies. 

That concentration rivals what you'd get from picking individual stocks—except you're paying management fees for the privilege.

Here's what we know about the current landscape.

The core appeal remains straightforward: AI leadership changes rapidly. 

Capital-weighted funds automatically shift toward winners. When a company gains market dominance, its portfolio weight increases without requiring active decisions. You capture emerging leaders without constant monitoring.

The sector spans multiple value chain segments. Hardware manufacturers, software developers, cloud infrastructure, and security providers all benefit from AI adoption. 

Sector-wide ETFs provide exposure across this ecosystem rather than betting on a single layer.

Volatility matters for most portfolios. Individual AI stocks can move 10-20% on quarterly earnings. Fund structures smooth these swings across dozens of holdings.

Dilution undermines the strategy. Many funds marketed as AI-focused hold familiar tech giants that already populate broad market indices. You may already own Microsoft and Alphabet through S&P 500 exposure. Paying 0.60-0.75% annual fees for redundant positions destroys long-term returns when comparable index funds cost 0.03%.

Fee structures compound over time. Thematic ETFs charge 20-25 times more than broad market alternatives. That gap matters more than you might think. On a 20-year horizon, those fees consume substantial portfolio gains.

You cap upside potential. When a single stock delivers 300% returns while peers stagnate, your ETF shows moderate growth. Nvidia's 2023-24 performance illustrates this perfectly—individual holders captured that full move, while fund investors got diluted returns.

Concentration persists inside diversified vehicles. Semiconductor-focused funds like SMH derive up to a quarter of their value from one company. That's not diversification. It's leveraged exposure to a single name's execution risk, wrapped in a diversified package.

Examine actual holdings, not marketing materials. Download the full constituent list and check overlap with your existing positions.

Compare expense ratios against performance. High fees require corresponding outperformance to justify costs.

Assess concentration metrics. Review the top 10 holdings and their combined weight. Anything exceeding 50% warrants scrutiny.

Differentiate fund types clearly. Pure semiconductor plays ($SMH ( ▲ 2.7% ) , $SOXX ( ▲ 2.88% ) ) deliver concentrated chip exposure. Thematic funds ($BOTZ ( ▲ 1.33% ) , $ROBO ( ▲ 0.73% ) ) blend automation and software. Broad AI vehicles ($AIQ ( ▲ 0.84% ) , $LRNZ ( ▼ 0.7% ) ) mix established tech giants with emerging players.

The strategic question isn't ETF vs individual stocks. 

It's whether your chosen ETF actually provides the diversification you're paying for, or just repackages concentrated bets at premium prices.

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Disclaimer: This is not financial or investment advice. Do your own research and consult a qualified financial advisor before investing.