TL;DR:
- AI-driven ETFs have been launched, promising to offer a more innovative approach to investing.
- AI-driven ETFs use advanced technologies such as machine learning, sentiment analysis, and natural language processing.
- Despite the hype surrounding these ETFs, their performance has been inconsistent.
- The limitations of AI when it comes to stock selection, combined with the added value of human intuition, suggest that investment managers may not be replaced by AI.
- AI-based systems still require a certain level of human intervention, with portfolio managers able to review and veto trades.
- AI is already streamlining the decision-making process and eliminating inefficiencies associated with human involvement.
- Human fund managers are still struggling to outperform indices and conventional ETFs that track them.
- The quality of AI technology for stock-picking is set to improve, with companies like OpenAI and Google investing billions in development.
- As more data sources become available, AI models will have a stronger foundation for their investment decisions.
Main AI News:
As machines make their way into the financial world, the question arises – can artificial intelligence truly replace investment managers? In recent years, a growing number of AI-driven ETFs have been launched, promising to offer a more innovative approach to investing. These ETFs, listed on stock exchanges, use advanced technologies such as machine learning, sentiment analysis, and natural language processing to identify market trends and select assets.
Some of the notable AI-driven ETFs include Qraft Technologies’ US Large Cap ETF (QRFT), US Large Cap Momentum ETF (AMOM), US Next Value ETF (NVQ), VanEck Social Sentiment ETF (BUZZ), EquBot’s AI Powered Equity ETF (AIEQ), Merlyn. AI’s Bull-Rider Bear-Fighter Index (WIZ) and its SectorSurfer Momentum ETF (DUDE), and WisdomTree International’s AI Enhanced Value Fund (AIVI).
Despite the hype surrounding these AI-powered ETFs, their performance has been inconsistent. Over a three-year period to April 19, 2023, the SPDR S&P 500 ETF (SPY) delivered returns of 14.8%, while QRFT delivered returns of 14.5%. Other AI-driven ETFs, such as AIEQ and WIZ, had lower returns of 4.4% and 6.4%, respectively.
The inconsistency in performance can be attributed to the limitations of AI when it comes to stock selection. According to Todd Rosenbluth, head of research at data provider VettaFi, “It is hard for active management of any kind to beat a low-cost index-based approach.” AI may struggle to track trends that are not reflected in past data, company reports, and news media. Joseph Byrum, a chief data scientist at Principal Financial Group, believes that “human intuition does add value” and that there are some risks that cannot be modeled by AI.
Despite their innovative approach, AI-based systems still require a certain level of human intervention. For instance, WisdomTree International’s AI ETF allows portfolio managers to review and veto trades, while EquBot has operational controls to manage fake or incorrect financial information and determine the trading frequency and types of securities. Nevertheless, AI is already streamlining the decision-making process and eliminating inefficiencies associated with human involvement. AI ETFs can quickly analyze a broad range of stocks and eliminate human biases and ego from the process.
However, human fund managers are still struggling to outperform indices and conventional ETFs that track them. Data from Morningstar shows that in 2022, only 48.7% of US equity funds and 43.2% of global equity funds outperformed their indices. Over a longer period from mid-2012 to mid-2022, the situation is even worse, with only 12% of US equity funds and 20% of global equity funds offering higher returns.
The quality of AI technology for stock-picking is set to improve, with companies like OpenAI and Google investing billions in development. As more data sources become available, AI models will have a stronger foundation for their investment decisions. Chris Natividad, Chief Investment Officer of EquBot, notes that “the data continues to explode” and that “90% of the data has been created in the past few years.” With the exponential growth of data, AI’s ability to make sound investment decisions is likely to improve.
Conlcusion:
The rise of AI-powered ETFs brings up the question of whether artificial intelligence can replace investment managers. Although AI-driven ETFs promise to offer a more innovative approach to investing, their performance has been inconsistent due to limitations in-stock selection. AI-based systems still require human intervention and oversight but are already streamlining the decision-making process and eliminating inefficiencies.
Meanwhile, human fund managers continue to struggle to outperform indices and conventional ETFs. As AI technology improves, with billions being invested by companies like OpenAI and Google, AI models will have a stronger foundation for their investment decisions. However, it seems that the value of human intuition will continue to play a role in the investment process.
