FXMAG UK – In recent years, nothing can compare to the investment theme of artificial intelligence. Exchange-traded funds, whose name is AI, have become like mushrooms after the rain, allowing you to invest in different ways in a portfolio of companies that will benefit from the dynamic development of technology. However, few people know that an ETF has been on the market for several years, which does not invest in AI-related companies, but is actively managed by an artificial intelligence algorithm.
Although its creators boast that it has better capabilities than “a thousand professional analysts working around the clock”, artificial intelligence has failed to capture the broad market, especially in the long term. Maybe this is why it’s not (yet) worth asking ChatGPT about how to build an investment portfolio for years.
Language, Artificial Intelligence and human intelligence.
‘If people can’t write well, they can’t think well, and if they can’t think well, other people will think about them’ https://t.co/FlhSTICGak by @gejito @sintetia#innovation #technology # AI #IA #education #society #tothink
— José Luis Casal (@jlcasal) May 25, 2023
- The first fully AI-managed stock exchange-traded fund has underperformed the broader market
- The experimental ETF had a promising start to the year, but is currently posting a weaker than expected rate of return.
- AI Powered Equity ETF is a fund where companies for the portfolio are selected through an artificial intelligence algorithm powered by the supercomputer. IBM (NYSE:) Watson
- More important information can be found on the FXMAG homepage
Artificial intelligence versus the real market
In recent months, artificial intelligence has clearly become the main investment theme of the financial markets. In addition to thousands of texts and videos about other companies that are “entering AI” or will benefit from the dynamic development of artificial intelligence, a lot of attention was also paid to the American fund AI Powered Equity ETF (AIEQ). This is a publicly traded and actively managed fund whose portfolio manager is… artificial intelligence, specifically an algorithm powered by the IBM Watson supercomputer. AIEQ is the first publicly available fund managed in this way, and moreover, it was created long before everyone started figuring each other out by asking tough ChatGPT questions. AI Powered ETF ETF was launched in October 2017. Its operator is ETF Managers, which co-created the fund in collaboration with fintech EquBot.
The co-creator of EquBot Chris Natividad bragged in numerous interviews that, thanks to the super computer IBM Watson, it is possible to demonstrate the effects of the work of thousands of professional financial analysts at the same time, who work not only 24 hours a day, but they also speak all languages and are able to respond with ease.
How does the fund choose companies for its portfolio?
First, artificial intelligence (including natural language understanding and processing models) determines overall financial assessment indicators for thousands of companies analyzed based on publicly available financial statement data. Data is also analyzed in real time, taking into account the latest reports and announcements from the companies. However, that is not all, because the algorithm behind the AI Powered ETF ETF also analyzes public information and publications, as well as discussions about specific companies, analyzing the mood and behavior of market participants. In theory, he is able to act as an ideal investor, who at the same time has analytical skills, able to interpret market events immediately and catch future trends.
Natividad also boasted that the ETF managed by AI decided to choose companies such as Moderna, Pfizer (NYSE:) and Johnson & Johnson (NYSE:) in their portfolio before announcing plans to begin work on a covid-19 vaccine.
Thousands of virtual analysts vs broad index
It sounds great in practice, but the numbers should be the best announcement for the first AI-run public fund. So is the AI Powered ETF ETF really outperforming the broader market and thus the most active portfolio managers to date?
You can find at least some texts on the web that report that AIEQ is “outperforming the general market”. A large number of them were created earlier this year, when the AI Powered ETF ETF for some time posted higher rates of return than its benchmark, which is the US S&P500 index. However, as is often the case, the media headlines only reflect a small part of the reality.
AIEQ outperformed the S&P500 in terms of performance during January, even noting growth of over 15% year-to-date to February (at the same time, the overall market “only” grew less than 10%). Starting in February, the dominance of the ETF, managed by IA, began to deteriorate, and as early as March, the fund began to underperform the S&P500. Currently (counting from the beginning of the year to the end of the May 24 session), the AIEQ is at a symbolic 1% higher, while the S&P500 index posts a rate of return of less than 8%.
Even worse when we check the rate of return of ETFs managed by artificial intelligence since its inception (October 2017). AEIQ’s total return since entering the market is 27%. So we can say that this is a good result, especially compared to our native index WIG20, which lost more than 20% at the same time. It is worse if we take as a benchmark the most popular ETF in the world, that is SPDR, a fund reflecting the S&P500 quotes at the same time which gave a gain of 75%. And this with much lower management costs: an SPDR costs less than a tenth of the annual percentage, while an AI-managed stock ETF costs 0.75% per year.
So, as you can see, even thousands of virtual analysts who don’t need to eat or sleep and speak every language can’t beat the broad US market in the medium to long term. For passive investors, this is another argument that simplicity works best for long-term investments in the market.
What does artificial intelligence invest in?
The AI Powered Equity ETF itself should be treated more with curiosity than as a portfolio component worth considering. Especially since the description of the strategy used by the artificial intelligence algorithm – apart from the fact that it processes an unimaginable amount of data every day – does not say clearly what the specific investment objectives and risk approach are. In the fund’s listing on the operator’s website, we can read that it “invests in companies that will increase in value over the long term, seeking the highest risk-adjusted return compared to the broad US stock market.”
So what is in the fund portfolio currently being managed by artificial intelligence?
AIEQ’s portfolio currently consists of 125 companies listed on the US Stock Exchange. Marvell Technology, a semiconductor company, holds the largest share (less than 5%). Since the beginning of the year, MRVL has posted a rate of return of almost 28% and its shares have gained almost 105% in the last five years, making it a strong position in the ETF portfolio. Interestingly enough, the second place in the portfolio (share more than 3.5%) taken by one of the leading “meme-stocks” Gamestop (NYSE:), which runs stationery stores with games and accessories for gamers. Other holdings in AIEQ’s portfolio include companies such as AMD (NASDAQ: ) (chip and consumer electronics maker), Head of capital Financial (NYSE:) Group (a retail bank, specializing in consumer and automobile loans) and KLA Corporation (a company that deals with quality and performance control and provides solutions for semiconductor manufacturers. AEIQ’s portfolio includes more companies in the semiconductor industry such as Microchip Technology (NASDAQ:), Texas Instruments (NASDAQ:) and Micron (NASDAQ:) Technology.
Interestingly enough, AI did not see fit to invest in stocks of giants like Apple (NASDAQ:), Microsoft (NASDAQ:), Meta (NASDAQ:) Platforms, or Alphabet (NASDAQ:) (although including in the portfolio with less than 1% holdings. , among others, Adobe Systems (NASDAQ:) and Netflix (NASDAQ:)).