Artificial intelligence is one of those buzz words that sound so futuristic. A computer that functions with the speed and intellect of a human without all the underlying emotion. Scientists and technology experts have spent decades working to develop this next innovative leap with mixed results. While some may argue that we aren’t all the way there yet, it should come as no surprise that investors can apply these themes directly in their portfolio using exchange-traded funds.
There are really two ways to accomplish this feat: 1) invest in companies that are working on artificial intelligence and robotics projects or 2) use intelligent algorithms to select stocks for you.
The former is best encapsulated by two rising stars in the ETF field. The ROBO Global Robotics and Automation Index ETF (ROBO) and Global X Robotics & Artificial Intelligence Thematic ETF (BOTZ). Both funds recently surpassed $2.3 billion in total assets (each) after an earth-shattering run in 2017 that saw BOTZ gain +58% and ROBO jump +44.26%.
The funds share the similar goal of investing in a small group of publicly-traded stocks from around the globe focused on robotics or highly advanced computer integration. ROBO contains 89 underlying holdings with a total expense ratio of 0.95%. BOTZ takes a more concentrated approach be selecting just 29 high growth companies to makeup its portfolio.
The obvious diversification complexities between the two funds allow for ROBO to capture a wider swath of stocks with more capital spread among the individual holdings. Conversely, BOTZ is highly focused on its top ten holdings with a significant emphasis on exposure to Japan. The distinct difference between the two indexes is why there will likely be a significant performance divergence over long time frames.
Along the second path of implementation in the AI field is the use of computers to select stocks using quantitative reasoning. This is the genesis behind The AI Powered Equity ETF (AIEQ). The fund promotes the ability go to beyond traditional “smart beta” ETFs by owning a select group of 40-70 stocks chosen through many criteria.
The computer-driven selection methodology analyzes thousands of companies to optimize portfolio exposure to try and beat the market. The fund does note that it will likely experience similar levels of volatility versus its benchmark.
Despite its namesake, AIEQ doesn’t just invest in technology stocks. It has holdings in companies such as Amazon.com Inc (AMZN), TRowe Price Group (TROW), and CIT Group Inc (CIT).
It’s notable that AIEQ has already accumulated over $150 million of capital since its October 2017 inception. That’s no small feat for an independent ETF with an above-average expense ratio of 0.75%. Clearly there is pent up demand for stock picking strategies that eschew a human bias.
Other ETFs are starting to realize the power (either real or conceived for marketing purposes) of artificial intelligence as well. The newly released Innovation Shares NextGen Protocol ETF (KOIN) owns a select group of block chain-related stocks. Its prospectus includes multiple references to algorithmic selection criteria based on many independent factors. The jury is still out on whether this will lead to better real-world performance or is just simply a facet of the underlying index.
The Bottom Line
Investors love a good story to get behind and artificial intelligence has become a burgeoning theme in the ETF industry. These strategies allow for two ways to attack this field through diversified investment vehicles that are liquid and easy-to-trade. While expense ratios in these funds are on the high side for the industry, their unique positioning will engender a modest premium in expenses.