Last week marked the debut of an upstart fund called the AI Powered Equity ETF, an actively managed security that seeks to use artificial intelligence to beat the market. The exchange-traded fund officially launched last Wednesday so it is too early to measure how this fund will perform over the long term.
At its core, AIEQ ETF is powered by the big-data processing abilities of IBM’s Watson. It is responsible to develop a portfolio of stocks that will be able to offer results that are not only better than human stock pickers but also the overall market. Most ETFs are passively managed and follow indexes like the S&P 500, the Dow industrials or other sectors. In other words, your new portfolio manager is a computer program.
The fund currently is composed of 70 stocks, plus an allotment of cash, that are spread around sectors. Components are determined by “their probability of benefiting from current economic conditions, trends, and world- and company-specific events,” EquBot said in a news release.
The top five holdings by concentration are Penumbra 4.63%, Boyd Gaming 4.51%, Genworth Financial 4.45%, Mednax 3.8% and Triumph Group 3.52%, according to XTF.com. The turnover is expected to be high around 2% – 3% per day. The fund charges an expense ratio of 0.75%, which is slightly lower than the average expense ratio for actively managed ETFs.
The information explosion has made the jobs of portfolio managers, equity analysts, quantitative investors and even ETF builders more challenging. New technology in artificial intelligence could help solve those challenges. There’s still quite a range in AI models being used. There could be other quantitative groups that are looking at the same raw data but analyzing it in a different way, meaning the same input material can result in different insights and outcomes.
Another example of an unusual method for picking stocks is Buzz US Sentiment Leaders ETF BUZ, an exchange-traded fund that selects its holdings based on positive chatter in social media and other online sources. The fund is up 17.2% in 2017, above the 13.9% rise of the S&P 500.
If the IBM’s Watson stock picking outperforms over the first quarter and money flows into the EFT, you’re going to see 20 competitors inside of six months.
This is a very gutsy structure, I am putting this ETF on my watch list. I am also going to monitor the top ten holdings of this ETF to get some stock picking ideas.