There are many ways to invest in artificial intelligence (AI). Avoid this one.

This WisdomTree Fund for AI and Innovation (WTAI -5.14%) is yet another exchange-traded fund (ETF) product that Wall Street wants to sell to investors. That’s not an idle statement, since the sponsor charges a pretty hefty 0.45% fee for the hot-button investment-themed product.

Be careful if you are considering the WisdomTree Artificial Intelligence and Innovation Fund; you would probably be better off S&P500 Index ETF.

What does the WisdomTree AI & Innovation Fund do?

The WisdomTree offering is an index-based ETF, so technically all WisdomTree does is match a portfolio to an index. The real question then is, what is the index that the WisdomTree Artificial Intelligence and Innovation Fund follows? That would be WisdomTree AI & Innovation Index. WisdomTree has the advantage of providing a link to the index directly in its objective statement. Too many ETFs force you to search for this information yourself.

The WisdomTree AI & Innovation Index is “designed to provide exposure to the securities of publicly traded companies around the world that are primarily engaged in the investment theme of AI & Innovation.” That’s about what you might expect, but how exactly does it do that? To find out, you’ll need to read the index methodology document. Once again, WisdomTree has helpfully made this document easily accessible.

In this document, you’ll find that the WisdomTree Artificial Intelligence & Innovation Index buys stocks operating in the software, semiconductor, and hardware sectors. When it comes to innovation in this puzzle, WisdomTree defines it as “companies that introduce a new, creative, or different (i.e., “innovative”) technological product or service with the goal of potentially changing the landscape of an industry, as well as companies that support these innovative technologies, particularly those related to artificial intelligence.”

WisdomTree’s AI and Innovation Fund Is a Big Question Mark

So you know what stocks are included in the index, more or less, but how do stocks actually make it into the index? It’s a little more complicated. According to the methodology, the index is “supervised by the WisdomTree Artificial Intelligence Index Committee.” The key explanation about the actual selection process is: “Qualitative and quantitative characteristics of eligible companies are evaluated by the Committee. Companies that are representative of the aforementioned AI activities and innovations are selected for inclusion in the index by the Committee.”

Sounds great, but go back and re-read those two statements. They don’t really say anything meaningful about the final selection process. The committee analyzes the stocks. The AI-linked stocks get included in the index. Are the stocks expected to be good investments? Does the analysis that’s being done actually change anything about the selection process? There’s a lot of room for assumptions in a situation where a clearer description could easily be made.

Then we have the weighting methodology, which is described as a “hierarchical, multi-category, modified equal-weighted index.” What does that mean? The description continues: “The committee makes strategic decisions on the weighting to assign to each of the AI ​​Action and Innovation themes based on market forecasts, assigning equal weights to component stocks that are selected for inclusion based on quantitative and qualitative criteria.”

WTAI data by YCharts

It sounds like the committee is strategically weighing the portfolio between the software, semiconductor, and hardware sectors, with a weighting in the sectors it likes the most. And then it balances out the stock weighting. So it’s both a kind of index fund and not, which brings the story down to performance. As you can see from the chart above, the WisdomTree Artificial Intelligence and Innovation Fund has woefully underperformed the S&P 500 and the broader tech sector since its inception. And that’s despite the popularity of many AI stocks over that time. The WisdomTree ETF seems to have done its best to easily outperform much simpler ETFs.

How much do you pay for all this?

Perhaps the best part of this story is that the WisdomTree Artificial Intelligence and Innovation Fund has an expense ratio of 0.45%. That’s pretty high for an ETF. But that’s what you’re paying to own an ETF that’s hard to understand, invests in a niche that may be a fad, and underperforms the broader offerings at a much lower cost. This is one ETF that’s probably best avoided by most investors.