Palantir Proved AI Can Make Money But There Is An ETF Problem

Palantir Technologies Inc's (NASDAQ:PLTR) recent earnings blowout was more than just another AI beat — it was a stress test on how AI and technology ETFs are actually constructed.

The Denver-based company reported 70% year-over-year revenue growth and a 56% free cash flow margin. It also boasts a Rule of 40 score of 127, which is more typical of early-stage software companies than of scaled platforms with $7.2 billion in cash on hand. Despite the operational fireworks, Palantir remains structurally underweight in many AI ETFs and overrepresented in a few thematic and factor ETFs.

This has created what portfolio managers call a weight distortion problem.

Jake Behan, Head of Capital Markets at Direxion, noted, "There had been tension between Palantir's AI narrative and its revenue mix, with the story running ahead of the numbers, and this quarter brought the two back into better balance."

For ETF construction, that balance shift matters.

Too Big For The Narrative, Too Small For The Basket

Most AI ETFs were designed for the initial leg of the AI trade: chips, cloud infrastructure, and model development. The heavy hitters are Nvidia Corp (NASDAQ:NVDA), Microsoft Corp (NASDAQ:MSFT), and the hyperscalers. Palantir doesn't quite fit into this box.

It isn't a compute play. It isn't monetizing AI models. Furthermore, it's monetizing AI decision-making at scale across defense, supply chain, energy, healthcare, and government.

This is important because the Palantir earnings call revealed a phenomenon that many AI ETFs have yet to tap into: AI-driven operating leverage, rather than AI-driven capex.

In general AI ETFs, such as the Global X Artificial Intelligence & Technology ETF (NASDAQ:AIQ), Palantir is generally weighted around 3%. In broader tech and software ETFs, the trend is beginning to shift, but it is still spotty. The iShares Expanded Tech-Software Sector ETF (BATS:IGV) currently weights Palantir around 8%, but many other tech ETFs are still well below that level.

The maximum portfolio weight for Palantir in a non-leveraged ETF is 10.5%.

This creates a familiar ETF problem: Palantir is doing the heavy lifting on fundamentals, with, in many cases, a middleweight allocation.

Where Palantir Quietly Dominates

The mispricing will become more apparent when considering non-traditional AI ETFs.

• A few thematic ETFs that do not leverage their portfolios already include Palantir as a major position.
• The iShares US Tech Independence Focused ETF (BATS:IETC) holds Palantir as approximately 10.5% of its portfolio
• The REX AI Equity Premium Income ETF (NASDAQ:AIPI) holds it at roughly 9%.
• The YieldMax Dorsey Wright Hybrid 5 Income ETF (NASDAQ:FIVY) comprises about 7.7% of its portfolio.

These ETFs are not trying to ride the AI trend; instead, they aim to position themselves as U.S.-focused tech, software, and factor-based plays.

By doing so, they have already made Palantir one of their major holdings before most traditional AI ETFs have even had a chance to rebalance their portfolios.

Government As Anchor, Not a Constraint

Palantir's government exposure has long been viewed as both a strength and a structural risk. This quarter reframed that debate.

"Government remained the anchor, but this quarter showed it was far from stagnant — it accelerated alongside commercial, which strengthens Palantir's overall story," Behan said. "The bull case for Palantir was simple: government remains the cash-flow anchor, and commercial AI showed real acceleration on top of it."

That acceleration matters for ETF investors who previously discounted Palantir due to customer concentration concerns.

"Government exposure can prove a double-edged sword providing durable revenue, but also concentration risk. The difference this quarter was how much commercial growth reduced reliance on any single customer group," Behan added.

For portfolio construction, that reduces a key justification for underweighting the stock.

Why Guidance Changed The Conversation

For a company trading at a premium multiple, forward guidance mattered as much as reported results.

"Forward guidance is incredibly important for a company like Palantir in light of its lofty forward P/E and the company just raised the bar with a very confident 2026 outlook," Behan said.

More importantly, Palantir delivered what AI investors have increasingly demanded: proof of commercial AI at scale.

"Traders didn't need a blowout, they needed proof of commercial AI at scale, and 115%+ growth guidance delivered exactly that," Behan said.

U.S. commercial revenue jumped more than 130% year over year, reinforcing that Palantir's AI is embedded in real workflows, not pilot programs.

"What's clear right now is that the market isn't rewarding AI hype, it's rewarding production," Behan said.

The Bigger ETF Question

Palantir's quarter was more than an important industry inflection point for the company. It highlighted an even larger question for ETF issuers: Is AI investing about building intelligence, or using it for profits?

Palantir is now clearly and firmly in the second category. But many AI ETFs are still built on companies that are still leveraging promise over production.

As Behan put it, "There is a broader AI monetization test happening across the market right now. This quarter helped position Palantir as a company showing AI in real workflows and generating real revenue."

Palantir may not find itself in the top weights of every AI ETF portfolio overnight. But one thing is clear from its Rule of 127 quarter: AI ETFs that don't include operational AI platforms in their portfolios risk owning the sizzle and missing the steak.

And Palantir just gave them the numbers to prove it.

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