Proprietary Data Insights
Top Non-Leveraged ETF Searches This Month
Do 2 Big ETFs That Use Artificial Intelligence To Pick Stocks Beat The Market?
If you just kept it simple and constructed an ETF portfolio of the top five most searched, non-leveraged ETFs in Trackstar, our proprietary sentiment indicator, here’s how you’d be looking YTD:
Throw in the VanEck Semiconductor ETF (SMH), which is our sister newsletter, The Spill’s, top ETF to play the Artificial Intelligence space and you’re up 45.2% on that one year to date.
However, there’s a difference between buying ETFs that own AI stocks and buying ETFs that use AI to select stocks. In today’s Juice, we focus on the latter, looking at how a few of the more notable names who use this approach are faring against some of the most popular ETFs so far in 2023.
Let’s start with one of the longest-standing AI ETFs. Employing IBM’s Watson technology, the AI Powered Equity ETF (AIEQ) is up 13.0% YTD. So, not bad, though not as good as the two main ETFs that track the broad market, SPY and QQQ.
The company that markets and manages AIEQ, ETFMG, claims Watson “equal(s) a team of 1,000 research analysts, traders and quants working around the clock” by “(a)nalyzing millions of data points across news, social media, industry and analyst reports, financial statements on over 6,000 U.S. companies, technical, macro, market data and more.”
However, if we can categorize Watson like that, what would we have to say about the passive indices ETFs such as SPY, QQQ and SMH track? They’re not really workhorses. Rather, they’re just the stock market doing its thing … doing what it always seems to do over time.
After AIEQ, we looked at the QRAFT AI-Enhanced U.S. Large Cap Momentum ETF (AMOM) because, YTD, it actually beats the S&P 500 with a 19.9% return.
We like the way QRAFT markets its ETF:
Our automated structure combines human intuition oversight with the superior processing and analytical depth delivered by AI.
This is interesting, however it begs the question: If you’re going to appear to go all-in with AI, why don’t you really go all-in with AI?
Because if you dig deep into the fine print of AMOM’s prospectus – which, of course, The Juice did – you see this:
… the Adviser has full discretion over investment decisions for the Fund. Therefore, the Adviser has full decision-making power not only if it identifies a potential technical issue or error with the U.S. Large Cap Database, but also if it believes that the recommended portfolio does not further the Fund’s investment objective or fails to take into account company events such as corporate actions, mergers and spin-offs.
So, “the Adviser” is a human. And AMOM is classified as an actively-managed ETF. While the AI technology QRAFT uses crunches the numbers and suggests stocks based on momentum, “the “Adviser” can still make on-the-ground decisions.
In its literature, AIEQ says it uses an “Automated data-driven investment process that removes human bias and errors.”
However, in the ETF’s prospectus, it says:
The Fund’s investment adviser utilizes the recommendations of the EquBot Model to decide which securities to purchase and sell … The Fund’s sub-adviser anticipates primarily making purchase and sale decisions based on information from the EquBot Model.
On one hand, we fully understand that it might sound as if we’re splitting hairs. Playing semantics.
On the other hand, it’s important to separate ETF marketing from how these companies – and their managers, human or otherwise – actually construct portfolios.
Because there’s still room for “human bias and errors” in both of these ETFs, if we don’t take the marketing on websites and legalese in the prospectuses at face value. Instead, we read the words they use and consider them the letter of the law. As, when making important investment decisions for your portfolio, we think you should.
The Bottom Line: We think using AI to guide and even totally inform the investment process can be a good thing. However, we’re not yet sold on the stock picking route via ETFs. Because, let’s face it, there are some pretty darn good, household-name passive ETFs out there that beat the heck out of a majority of active ETFs, including the ones driven by AI.
The Juice prefers using AI as one tool to help guide your overall investment approach. For example, it’s not easy to achieve diversification as an individual investor. AI products and platforms that can help you get there by analyzing data humans can’t possibly process as effectively and efficiently can absolutely make sense.
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