A handful
of fund managers are betting that exchange traded funds run by
AI stock-picking models can crunch data quicker and make better
investment decisions than humans, even as many people remain
wary or even fearful of artificial intelligence.
So far, fewer than half-a-dozen ETFs, collectively managing
only about $30 million of the ETF industry’s nearly $17 trillion
in assets, rely solely on AI-powered bots to control everything
from research to stock selection.
While that represents a tiny fraction of the industry, AI is
making its way slowly and steadily into the investment processes
of most asset managers, to some extent, even if that may not yet
be visible to investors themselves.
Earlier this year, 91 per cent of
asset managers surveyed by Mercer reported plans to increase
their use of AI-based portfolio management tools this year and
said they are trying to figure out what tasks can be safely
handed off to AI.
The performance of the handful of funds that rely solely on
AI to generate returns shows they are beating the market, even
if their track records stretch back only a few months. Their
managers argue these returns will attract more investments into
the idea over time.
“Until now you’ve had two choices: be a passive investor and
own an index, or be an active investor” with a human picking
stocks, said Tal Schwartz, founder and CEO of Ai Funds. “I want
to offer a third option: where it’s AI that is doing it all for
you.”
In August, Schwartz launched the High Conviction US Equity
AI-Managed ETF, built on a proprietary AI learning
algorithm that analyses decades of market data. So far, it has
attracted less than $20 million in assets, according to data
from ETF.com, but Schwartz said it is still early days.
AI can crunch more data more rapidly than any human being,
he said, and strips human emotions and cognitive biases out of
the investment process.
“I know this is a long-term process, that people will only
become convinced over time,” he added. “I think that what will
convince them is performance.”
Schwartz’s fund is up 2.7% since its August 21 launch,
beating the 1.1% gain for the S&P 500 index in the same time
frame.
Two funds launched by Israeli asset manager FinQ in February
have handily beaten the 11% gain by the S&P over that time
frame. FinQ’s dollar-neutral US Large-Cap AI-managed ETF
has soared 25.35% and the version of the ETF not
offering a currency hedge is 23.98% higher since inception.
Two other funds, the Pacer S&P 500 3AI Top 100 ETF
and the Pacer S&P World 3AI Top 100 ETF, are ahead
10.34% and 10.33%, respectively, since their launches in early
May, compared to a gain of 5.8% for the S&P 500.
Nonetheless, advisers and analysts said the funds’ short
track records and above-average fees may limit investor
interest.
“Advisers are comfortable with AI that informs a decision
and uneasy with AI that makes it,” said Jeff Judge, a financial
adviser at Chesapeake Financial Planners in Forest Hill,
Maryland, adding his clients are not clamoring for this.
“Proof that this approach works will really come down to who
can thoughtfully manage risk and ride out a down market,” said
Todd Sohn, ETF analyst at Strategas.
AI-enhanced ETFs more common
Other firms have rolled out “AI-enhanced” ETFs, which use AI
to undertake quantitative analysis, analyse stocks or monitor
risk. This cautious approach is more common, insiders said.
“We’ve been training models using AI for seven or eight
years now, and using them to run live capital for about four
years,” said David Wright, head of quantitative investments at
Pictet Asset Management in Geneva.
His firm launched the Pictet AI Enhanced US Equity ETF
in February. Since its debut, the fund has attracted
$163 million in assets and posted gains of 14.8%, compared to
11.4% for the S&P 500.
Wright compares using AI in the investment process to using
a plane’s autopilot functions. The autopilot may be able to take
off, cruise and land with no humans involved, but, he added, “I
wouldn’t go on a plane that didn’t have a pilot.”
Other asset managers are taking a similarly cautious
approach to integrating AI.
“I’m not losing any sleep over robots ending the world,”
said Dan Taylor, deputy chief investment officer of systematic
within Man Group, referring to recent headlines. “But I still do
worry about AI’s ability to deal with the most extreme, unlikely
events, where all the action happens, both good and bad.”