Why BAI Offers a Stronger Conviction Play in AI Than CHAT as We Enter a Market Correction Phase

As the markets brace for a potential correction, the strategic positioning of exchange-traded funds (ETFs) focused on artificial intelligence (AI) has taken on renewed urgency. Two prominent contenders-the Beta Beta AI ETF (BAI) and the ARK AI Impact ETF (CHAT)-offer divergent approaches to AI investing. While both target the AI boom, BAI's concentrated exposure to U.S. hyperscalers and its active management model position it as a more resilient and strategically sound choice for investors seeking conviction in a volatile environment.

ETF Positioning: Active Management and Sector Focus

BAI and CHAT both employ active management, but their portfolio structures reflect distinct philosophies. BAI, with 49 holdings as of 2025, is heavily weighted toward U.S. hyperscalers and AI infrastructure leaders. Its top holdings include NVIDIA (9.80%), Broadcom (8.14%), and Meta (6.02%), all of which are foundational to the AI ecosystem as of the latest holdings. This concentration in high-conviction names aligns with a strategy that prioritizes capturing growth from companies best positioned to scale AI capabilities.

In contrast, CHAT's portfolio, though also active, is more fragmented. Its top 10 holdings account for 43% of assets, with Alphabet (7.68%), Microsoft (4.95%), and Amazon (3.39%) leading the pack according to stock analysis. While these are undeniably dominant players, CHAT's broader allocation to generative AI software and services-such as Palantir-introduces exposure to companies with less predictable revenue streams. During a correction, such fragmentation may amplify downside risk compared to BAI's focus on infrastructure and semiconductors, which underpin the entire AI value chain.

Market Resilience: Infrastructure vs. Ephemeral Demand

The resilience of AI ETFs during a correction hinges on the durability of their underlying holdings. BAI's emphasis on U.S. hyperscalers-companies like NVIDIA and Broadcom-targets firms with recurring revenue models and pricing power.

For instance, NVIDIA's dominance in AI chips and data-center solutions has made it a linchpin for cloud providers and enterprises, creating a moat that insulates it from short-term volatility. Similarly, Broadcom's semiconductor expertise ensures its relevance across industries, not just AI.

CHAT, by contrast, leans into generative AI software and cloud services, which face more immediate scrutiny during downturns. While Alphabet and Microsoft are formidable, their AI divisions are still maturing, and their valuations are more susceptible to shifts in demand for consumer-facing tools like chatbots or content-generation platforms. A correction could disproportionately impact these segments, as investors retreat to more defensible sectors.

Strategic Concentration: Quality Over Quantity

Critics of concentrated portfolios often cite diversification as a safeguard against risk. Yet, in the AI space, strategic concentration can be a strength. BAI's non-diversified structure allows it to overweight leaders in AI infrastructure, where network effects and technical barriers to entry are highest. This approach mirrors the success of the "Magnificent Seven," whose market capitalizations have been buoyed by their ability to scale AI-driven services.

CHAT's diversification, while theoretically protective, dilutes its focus. Its 42 holdings include a mix of AI software firms, cloud providers, and hardware manufacturers, but its top 10 holdings alone account for nearly half of its assets. This suggests a lack of balance, as the fund's performance becomes overly reliant on a handful of stocks. During a correction, such overconcentration could lead to outsized losses if any of these names underperform-a risk mitigated by BAI's tighter alignment with infrastructure leaders.

The Case for BAI: Conviction in a Correction

BAI's recent inflows of $391.72 million, reflecting a 6.78% increase in assets under management, underscore investor confidence in its strategy. This demand is not merely speculative; it reflects recognition of the fund's alignment with the AI infrastructure boom. Meanwhile, CHAT's 64.4% trailing-year return, while impressive, was driven by a concentrated bet on generative AI-a sector that may face headwinds as valuations normalize as reported by market analysts.

In a correction, BAI's focus on U.S. hyperscalers-companies with robust balance sheets, recurring revenue, and critical roles in the AI supply chain-offers a clearer path to resilience. Its active management allows for agile adjustments, while its expense ratio (lower than CHAT's) ensures cost efficiency. For investors seeking a conviction play, BAI's strategic concentration in the bedrock of AI innovation is a compelling argument.