AI-Powered Stock Funds Challenge Human Investors With Strong Early Gains
The Rise of AI in Exchange Traded Funds
By Suzanne McGee
AI-Driven ETFs: Early Adoption and Performance
PROVIDENCE, Rhode Island, Oct 14 (Reuters) - 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% 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.
AI-Only Funds Outperforming the Market
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."
Case Study: High Conviction US Equity AI-Managed ETF
In August, Schwartz launched the High Conviction US Equity AI-Managed ETF, built on a proprietary AI learning algorithm that analyzes 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.
Other Notable AI-Driven Funds
Two funds launched by Israeli asset manager FinQ in February have handily beaten the 11.0% 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.
Challenges and Skepticism
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: A Cautious Approach
Gradual Integration of AI in Asset Management
AI-ENHANCED ETFS MORE COMMON
Other firms have rolled out "AI-enhanced" ETFs, which use AI to undertake quantitative analysis, analyze 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.
Case Study: Pictet AI Enhanced US Equity ETF
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."
Industry Perspectives on AI Integration
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."
(Reporting by Suzanne McGee; editing by Megan Davies and Nia Williams)