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4 AI-powered ETFs: Pros and cons of AI stockpicking funds

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Artificial intelligence has become a prominent trend in recent times, and it’s no wonder that investors are turning to AI for a competitive edge in the world of investing. However, the concept of AI is not limited to just well-connected experts. Anyone can participate by investing in exchange-traded funds (ETFs) that utilize machine learning tools to analyze stocks, make predictions, and invest accordingly.

Let’s delve into some key aspects of AI-powered funds and explore the current trading options available in the realm of AI funds.

What is an AI-powered fund?

AI-powered funds utilize machine learning to conduct research and make investment decisions, not limited to AI companies like Nvidia. Instead, they leverage this technology to identify patterns in data and carefully select which stocks to invest in. By doing so, these funds maximize their ability to make informed investment choices.

In many instances, AI leverages public data points to gauge market sentiment toward stocks. It gathers information from various sources such as social media, news, financial statements, analyst reports, and online message boards to capture the market’s pulse. Depending on its objective, the AI meticulously examines financial data and forecasts which businesses are likely to sustain strong performance. It then distills its research into a curated list of stocks for fund managers. This approach enables the AI to provide valuable insights and guidance for investment decisions.

Some AI models not only select attractive stocks but also provide recommendations on the appropriate quantity to purchase while ultimately leaving the final decision-making to human fund managers.

These AI models have the potential to simplify the process of identifying attractive investments by potentially identifying traits that are correlated with outperformance, thereby enhancing the productivity of the fund’s managers. Consequently, AI enables managers to allocate more time towards conducting in-depth research and determining which stocks are truly worthy of further investment, both in terms of time and money.

What are the pros and cons of AI funds?

AI-powered funds have the potential to revolutionize the game, but investors should not underestimate the drawbacks. As these funds are relatively new, the benefits are primarily hypothetical until they are put into practice (or proven otherwise).

Pros of AI funds

  • Potentially low costs: An AI-driven fund has the potential to replace a team of stock analysts, or at the very least, enhance their expertise, resulting in improved efficiency and reduced expense ratio for the funds. As a result, this offers investors a more cost-effective solution.
  • Potential outperformance: With effective management and programming, an AI-powered fund has the potential to surpass the overall market performance. However, there’s a risk of it turning into a competitive race, as the growing presence of AI-powered funds diminishes their edge. Only time will tell if they can consistently outperform passive investing.
  • Flexibility: AI-powered funds offer greater flexibility in adapting to market conditions compared to traditional human traders. For instance, AI has the capability to identify shifts in market volatility and respond proactively by investing in stocks that have the potential to outperform in such an environment.

Cons of AI funds

  • Limited track record: The performance of many AI-powered funds, which have been around for a year or two, remains uncertain at best in terms of delivering favorable returns. Investors should prioritize reviewing several years of performance data and comparing it to a basic S&P 500 index fund, known for its long-term track record of approximately 10 percent annual returns.
  • Low assets under management: Several AI funds currently have low assets under management, resulting in relatively limited interest in the fund (at least for now). This could potentially pose some challenges when it comes to exiting the fund without significantly impacting its price.
  • Relatively high cost: A small fund can have another consequence – a potentially higher expense ratio. With fewer assets to distribute costs across, a small fund may result in increased ongoing expenses for investors. Moreover, these funds may have limited track records, leading investors to pay more for underperformance.

4 AI-powered funds

Presented below are four AI-powered exchange-traded funds (ETFs) along with pertinent details, accurate as of August 16, 2023.

AI Powered Equity ETF (AIEQ)

When considering AI-powered stock selection, this fund comes to mind. Leveraging IBM Watson’s capabilities, the fund thoroughly analyzes various aspects including social media, news, financial statements, and analyst reports of numerous American companies. Subsequently, the AI identifies 30 to 200 stocks expected to outperform in the upcoming twelve months. This comprehensive approach ensures both precision and potential for substantial returns.

VanEck Social Sentiment ETF (BUZZ)

The ETF is a passively managed fund that tracks the BUZZ NextGen AI US Sentiment Leaders Index. This index comprises 75 large-cap stocks with highly positive investor sentiment. Sentiment data is collected from various sources, including news, social media, financial news, and blogs. The fund has been operational since March 2021, leveraging millions of data points to inform its investment decisions.

WisdomTree International AI Enhanced Value Fund (AIVI)

Utilizing an AI model, this fund conducts thorough research to identify undervalued stocks. However, it exclusively includes mid- and large-cap stocks from developed markets outside of the U.S. and Canada. The primary focus of this fund is on generating income and achieving capital appreciation. In January 2022, the fund underwent a strategic transformation, incorporating AI technology to efficiently scan the market for stocks with more favorable valuations.

Qraft AI-Enhanced U.S. Large Cap Momentum ETF (AMOM)

While humans oversee the operations of this fund, it is the AI that delves into the market and provides recommendations on what to buy and in what quantities. The AI focuses on large-cap momentum stocks, which have exhibited strong performance in the recent past and are expected to continue doing so in the near future. This fund was established in May 2019.

Bottom line

While the concept of AI-powered stock selection is exciting, its actual implementation is still in its early stages. Investors who are contemplating using an AI stock-picker should thoroughly evaluate their own requirements, as well as the potential performance and costs of the fund, in comparison to traditional ETFs.

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