This strategy lets you invest in the AI boom and reduce risk at the same time

Dow Jones
Oct 15

MW This strategy lets you invest in the AI boom and reduce risk at the same time

By Philip van Doorn

Gabelli portfolio manager Macrae Sykes makes the case that financial-services companies are 'levered to increased automation and more customization'

The development of generative artificial intelligence will transform many industries beyond the semiconductor manufacturers, cloud-computing giants and social-media companies that have been dominating the coverage in the financial media.

If you are interested in riding the wave of investment in generative artificial intelligence, you might be able to reduce your risk by adding exposure to financial-services companies.

Macrae Sykes, the portfolio manager of the Gabelli Financial Services Opportunities ETF GABF, believes large banks are "levered to increased automation and more customization." They process billions of transactions nightly for hundreds of millions of customers. They were working to manage and secure tremendous customer data sets for decades before the onset of generative AI.

The fund, "GABF," is an exchange-traded fund. Shares were first publicly traded in May 2022. It typically holds about 40 stocks of companies that Sykes believes are positioned to benefit from higher demand for financial services as wealth is transferred from the baby-boom generation to younger generations. He is also focused on identifying financial companies that can benefit from improved efficiency, products and services as new technology is deployed.

The fund is rated five stars - the highest rating - within Morningstar's "U.S. Fund Financial" category.

The case for financial services as an AI play

During an interview with MarketWatch, Sykes cited comments from Bank of New York Mellon Corp. $(BK)$ Chief Financial Officer Dermot McDonogh at the Barclays Global Financial Services Conference in New York on Sept. 9.

When answering a question about AI, McDonogh referred to the "huge amount of payments" the bank processes daily. Most of the transactions are processed automatically, but he said that about 2% require "manual stuff that humans have to go in to fix," according to a transcript provided to Sykes by FactSet.

McDonogh continued: "Digital employees are now starting to do ... work that humans don't want to have to do because it's quite messy. It's quite manual."

He went on to describe loan underwriting and booking functions. "Humans have to spend a few hours searching through [the] internet, looking for facts and figures and stuff about you. AI can do that in a couple of minutes."

Sykes said that for banks and other financial-services providers, "the more smart computing you can throw at it, the more efficient you become for regulation and risk management."

So this appears to be an ideal setup for large financial firms to make steady improvements to efficiency and operating metrics. Over time, the large banks' greater ability to invest in automation could serve as a catalyst for consolidations. Smaller players may not be able to compete.

Reducing AI investment risk

Investors have been focused on the AI hardware build-out, led by Nvidia Corp. (NVDA), which has been spreading to other companies, such as Advanced Micro Devices Inc. $(AMD)$, whose stock was up 34% from Sept. 30 through Monday. AMD's stock was up 79% for 2025 through Monday, while Broadcom Inc.'s $(AVGO)$ stock was up 54%.

AI hardware coverage:

-- Here's what the Open AI-AMD deal says about Nvidia

-- Broadcom's stock is soaring on a new OpenAI deal. Why Wall Street is so upbeat.

And the Big Tech companies paying for the hardware build-out have also been performing well for the most part. They dominate the S&P 500 SPX, with Nvidia, Microsoft Corp. $(MSFT)$, Apple Inc. $(AAPL)$, Amazon.com Inc. (AMZN) and Broadcom making up 28% of the SPDR S&P 500 ETF Trust SPY.

The S&P 500 is 40% concentrated to its largest 10 companies. That is the highest level of concentration since at least 1972, according to analysts at Ned Davis Research.

So expanding your AI exposure to an ETF focused on financial stocks benefiting from the new technology can diversify your portfolio and lower your overall risk.

Don't miss: The AI boom really isn't - for the broader economy, according to these economists

Strong performance with an AI-related hiccup

This chart shows the three-year total return of the Gabelli Financial Services Opportunities ETF GABF against that of Financial Select Sector SPDR ETF XLF and the SPDR S&P 500 ETF Trust through Monday.

Total returns with dividends invested for three years through Oct. 13.

ETF returns in this article are net of fund expenses and include reinvested dividends. GABF is benchmarked to the S&P 500 financial sector. XLF tracks the financial sector of the S&P 500 by holding all 75 stocks weighted by market capitalization.

GABF's annual expenses come to 0.90% of assets under management. That would normally make for an annual fee of $90 for a $10,000 investment. But Gabelli Funds is waiving 0.58% of the expenses until at least April 30, 2026, so for now the expense ratio is 0.32%. Actively managed funds tend to have higher expenses than passively managed funds that track stock indexes or sectors. For XLF the expense ratio is 0.08%. For SPY, the expense ratio is 0.0945%.

If you look more closely at the three-year chart of total returns, you will see that despite the stellar three-year performance GABF has not been a very good performer in 2025. Through Monday, the fund had returned 3.4% to date in 2025, compared with returns of 10.1% for XLF and 14.1% for SPY.

Sykes said the main reason for this year's weaker performance for GSBF has been pressure on FactSet Research Systems Inc. $(FDS)$, whose stock was down 40% for 2025 through Monday, with dividends reinvested.

"FactSet gave guidance for next year and said they would have to invest more in their own technology platform to stay competitive. [To] leverage AI they are having to spend more, which is depressing their earnings growth," Sykes said. Over the long term FactSet has been a "great company," he said, but he added that it had been a mistake to continue to hold FactSet, and he has sold out of the position.

Top holdings of GABF

Here are the largest 10 holdings of the Gabelli Financial Services Opportunities ETF:

   Company                         Ticker    % of GABF portfolio  Forward P/E  2025 total return 
   SuRo Capital Corp.              SSSS                     8.0%          N/A                65% 
   Berkshire Hathaway Inc.         BRK.B                    6.5%         22.4                 9% 
   Interactive Brokers Group Inc.  IBKR                     6.1%         32.0                60% 
   JPMorgan Chase & Co.            JPM                      5.4%         14.7                31% 
   Wells Fargo & Co.               WFC                      4.8%         12.0                14% 
   Fiserv Inc.                     FI                       4.5%         10.6               -40% 
   W R Berkley Corp.               WRB                      4.5%         16.8                34% 
   KKR & Co Inc.                   KKR                      4.3%         18.5               -18% 
   Blackstone Inc.                 BX                       4.1%         25.1                -6% 
   Credit Acceptance Corp.         CACC                     3.9%         11.6                 4% 
                                                                    Sources: Gabelli Funds, LSEG 

The table includes forward price-to-earnings ratios. These are current share prices divided by consensus earnings-per-share estimates for the next 12 months among analysts polled by LSEG. In comparison, the S&P 500 trades at a weighted forward P/E of 22.8.

"You can play AI through a much lower multiple, with good clarity in financial services," Sykes said.

There is no forward P/E on the table for SuRo Capital $(SSSS)$, which is the largest holding of the Gabelli Financial Services Opportunities ETF, because no consensus earnings estimate is available.

SuRo Capital invests in companies it expects to go public through initial offerings of stock to the public. This company goes through cycles as it invests and waits for the IPOs to take place. Sykes said that as a business-development company, SuRo is required to distribute any capital gains it earns as dividends to its shareholders.

SuRo Capital's successful investments have included CoreWeave Inc. (CRWV), whose Class A shares closed at $141.62 Monday. CoreWeave's IPO was priced at $40 in March. SuRo's current investments include OpenAI, the developer of ChatGPT, and Canva, a software developer.

Competing ETFs

LSEG lists 35 ETFs as competitors to GABF, which ranks second on the full list of 36 funds for three-year average total returns through Sept. 30. Here are the top five performers from that list, with XLF at the bottom for reference:

   ETF                                               Ticker   Three-year average return Launch Date   Assets ($mil)  Expense ratio 
   iShares MSCI Europe Financials ETF               EUFN                          41.3%  1/20/2010           $4,504          0.48% 
   Gabelli Financial Services Opportunities ETF     GABF                          32.5%  5/9/2022               $39          0.32% 
   SPDR S&P Capital Markets ETF                     KCE                           31.2%  11/8/2005             $630          0.35% 
   iShares US Broker-Dealers & Securities Exch ETF  IAI                           29.4%  5/1/2006            $1,573          0.38% 
   iShares Global Financials ETF                    IXG                           27.3% 11/12/2001             $595          0.41% 
   Financial Select Sector SPDR Fund                XLF                           23.2% 12/16/1998          $54,021          0.08% 
                                                                                                                      Source: LSEG 

Click on the ticker symbols for more about any stock, ETF or index.

MW This strategy lets you invest in the AI boom and reduce risk at the same time

By Philip van Doorn

Gabelli portfolio manager Macrae Sykes makes the case that financial-services companies are 'levered to increased automation and more customization'

The development of generative artificial intelligence will transform many industries beyond the semiconductor manufacturers, cloud-computing giants and social-media companies that have been dominating the coverage in the financial media.

If you are interested in riding the wave of investment in generative artificial intelligence, you might be able to reduce your risk by adding exposure to financial-services companies.

Macrae Sykes, the portfolio manager of the Gabelli Financial Services Opportunities ETF GABF, believes large banks are "levered to increased automation and more customization." They process billions of transactions nightly for hundreds of millions of customers. They were working to manage and secure tremendous customer data sets for decades before the onset of generative AI.

The fund, "GABF," is an exchange-traded fund. Shares were first publicly traded in May 2022. It typically holds about 40 stocks of companies that Sykes believes are positioned to benefit from higher demand for financial services as wealth is transferred from the baby-boom generation to younger generations. He is also focused on identifying financial companies that can benefit from improved efficiency, products and services as new technology is deployed.

The fund is rated five stars - the highest rating - within Morningstar's "U.S. Fund Financial" category.

The case for financial services as an AI play

During an interview with MarketWatch, Sykes cited comments from Bank of New York Mellon Corp. (BK) Chief Financial Officer Dermot McDonogh at the Barclays Global Financial Services Conference in New York on Sept. 9.

When answering a question about AI, McDonogh referred to the "huge amount of payments" the bank processes daily. Most of the transactions are processed automatically, but he said that about 2% require "manual stuff that humans have to go in to fix," according to a transcript provided to Sykes by FactSet.

McDonogh continued: "Digital employees are now starting to do ... work that humans don't want to have to do because it's quite messy. It's quite manual."

He went on to describe loan underwriting and booking functions. "Humans have to spend a few hours searching through [the] internet, looking for facts and figures and stuff about you. AI can do that in a couple of minutes."

Sykes said that for banks and other financial-services providers, "the more smart computing you can throw at it, the more efficient you become for regulation and risk management."

So this appears to be an ideal setup for large financial firms to make steady improvements to efficiency and operating metrics. Over time, the large banks' greater ability to invest in automation could serve as a catalyst for consolidations. Smaller players may not be able to compete.

Reducing AI investment risk

Investors have been focused on the AI hardware build-out, led by Nvidia Corp. (NVDA), which has been spreading to other companies, such as Advanced Micro Devices Inc. (AMD), whose stock was up 34% from Sept. 30 through Monday. AMD's stock was up 79% for 2025 through Monday, while Broadcom Inc.'s (AVGO) stock was up 54%.

AI hardware coverage:

-- Here's what the Open AI-AMD deal says about Nvidia

-- Broadcom's stock is soaring on a new OpenAI deal. Why Wall Street is so upbeat.

And the Big Tech companies paying for the hardware build-out have also been performing well for the most part. They dominate the S&P 500 SPX, with Nvidia, Microsoft Corp. (MSFT), Apple Inc. (AAPL), Amazon.com Inc. (AMZN) and Broadcom making up 28% of the SPDR S&P 500 ETF Trust SPY.

The S&P 500 is 40% concentrated to its largest 10 companies. That is the highest level of concentration since at least 1972, according to analysts at Ned Davis Research.

So expanding your AI exposure to an ETF focused on financial stocks benefiting from the new technology can diversify your portfolio and lower your overall risk.

Don't miss: The AI boom really isn't - for the broader economy, according to these economists

Strong performance with an AI-related hiccup

This chart shows the three-year total return of the Gabelli Financial Services Opportunities ETF GABF against that of Financial Select Sector SPDR ETF XLF and the SPDR S&P 500 ETF Trust through Monday.

Total returns with dividends invested for three years through Oct. 13.

ETF returns in this article are net of fund expenses and include reinvested dividends. GABF is benchmarked to the S&P 500 financial sector. XLF tracks the financial sector of the S&P 500 by holding all 75 stocks weighted by market capitalization.

GABF's annual expenses come to 0.90% of assets under management. That would normally make for an annual fee of $90 for a $10,000 investment. But Gabelli Funds is waiving 0.58% of the expenses until at least April 30, 2026, so for now the expense ratio is 0.32%. Actively managed funds tend to have higher expenses than passively managed funds that track stock indexes or sectors. For XLF the expense ratio is 0.08%. For SPY, the expense ratio is 0.0945%.

If you look more closely at the three-year chart of total returns, you will see that despite the stellar three-year performance GABF has not been a very good performer in 2025. Through Monday, the fund had returned 3.4% to date in 2025, compared with returns of 10.1% for XLF and 14.1% for SPY.

Sykes said the main reason for this year's weaker performance for GSBF has been pressure on FactSet Research Systems Inc. (FDS), whose stock was down 40% for 2025 through Monday, with dividends reinvested.

"FactSet gave guidance for next year and said they would have to invest more in their own technology platform to stay competitive. [To] leverage AI they are having to spend more, which is depressing their earnings growth," Sykes said. Over the long term FactSet has been a "great company," he said, but he added that it had been a mistake to continue to hold FactSet, and he has sold out of the position.

Top holdings of GABF

Here are the largest 10 holdings of the Gabelli Financial Services Opportunities ETF:

   Company                         Ticker    % of GABF portfolio  Forward P/E  2025 total return 
   SuRo Capital Corp.              SSSS                     8.0%          N/A                65% 
   Berkshire Hathaway Inc.         BRK.B                    6.5%         22.4                 9% 
   Interactive Brokers Group Inc.  IBKR                     6.1%         32.0                60% 
   JPMorgan Chase & Co.            JPM                      5.4%         14.7                31% 
   Wells Fargo & Co.               WFC                      4.8%         12.0                14% 
   Fiserv Inc.                     FI                       4.5%         10.6               -40% 
   W R Berkley Corp.               WRB                      4.5%         16.8                34% 
   KKR & Co Inc.                   KKR                      4.3%         18.5               -18% 
   Blackstone Inc.                 BX                       4.1%         25.1                -6% 
   Credit Acceptance Corp.         CACC                     3.9%         11.6                 4% 
                                                                    Sources: Gabelli Funds, LSEG 

The table includes forward price-to-earnings ratios. These are current share prices divided by consensus earnings-per-share estimates for the next 12 months among analysts polled by LSEG. In comparison, the S&P 500 trades at a weighted forward P/E of 22.8.

"You can play AI through a much lower multiple, with good clarity in financial services," Sykes said.

There is no forward P/E on the table for SuRo Capital (SSSS), which is the largest holding of the Gabelli Financial Services Opportunities ETF, because no consensus earnings estimate is available.

SuRo Capital invests in companies it expects to go public through initial offerings of stock to the public. This company goes through cycles as it invests and waits for the IPOs to take place. Sykes said that as a business-development company, SuRo is required to distribute any capital gains it earns as dividends to its shareholders.

SuRo Capital's successful investments have included CoreWeave Inc. (CRWV), whose Class A shares closed at $141.62 Monday. CoreWeave's IPO was priced at $40 in March. SuRo's current investments include OpenAI, the developer of ChatGPT, and Canva, a software developer.

Competing ETFs

LSEG lists 35 ETFs as competitors to GABF, which ranks second on the full list of 36 funds for three-year average total returns through Sept. 30. Here are the top five performers from that list, with XLF at the bottom for reference:

   ETF                                               Ticker   Three-year average return Launch Date   Assets ($mil)  Expense ratio 
   iShares MSCI Europe Financials ETF               EUFN                          41.3%  1/20/2010           $4,504          0.48% 
   Gabelli Financial Services Opportunities ETF     GABF                          32.5%  5/9/2022               $39          0.32% 
   SPDR S&P Capital Markets ETF                     KCE                           31.2%  11/8/2005             $630          0.35% 
   iShares US Broker-Dealers & Securities Exch ETF  IAI                           29.4%  5/1/2006            $1,573          0.38% 
   iShares Global Financials ETF                    IXG                           27.3% 11/12/2001             $595          0.41% 
   Financial Select Sector SPDR Fund                XLF                           23.2% 12/16/1998          $54,021          0.08% 
                                                                                                                      Source: LSEG 

Click on the ticker symbols for more about any stock, ETF or index.

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-Philip van Doorn

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