One of the most notable success stories on Wall Street in 2017 isn’t exactly a human-interest story.
The AI Powered Equity, an exchange-traded fund that uses artificial intelligence technology to select the stocks it holds, has emerged as one of the most successful new funds of the year, proving so popular with investors that it has stunned its own (human) creators.
“We were absolutely surprised by the degree of interest,” said Art Armador, co-founder of EquBot LLC, which sponsored the fund. “We launched with $2.5 million in assets and were hoping to get to $40 million by the end of the year. Instead, we got that within the first week and now we’re north of $70 million. It blew our minds.”
The fund’s software “constantly” analyzes information for roughly 6,000 US-listed stocks, according to the company, scanning through regulatory filings, news articles, social media posts, and traditional financial metrics — including factors pertaining to correlations and valuations — to find investments it perceives as undervalued. Daily turnover is high compared with other actively managed funds, EquBot said.
So far, there has proved to be so much demand that the coverage universe it tracks had to be tweaked. With just $2.5 million in assets, it could invest in micro capitalization stocks without having a pronounced impact on their share movements. At its current size, however, especially with the higher turnover, “the liquidity profile looks very different,” Armador said. The fund now has a larger focus on companies with a higher market cap, which can be bought or sold with less of an impact on daily movement.
The ETF currently has $73.4 million in assets, which represents extremely strong growth for a new fund, particularly one that’s not from a major provider — the ETF is EquBot’s first investment product. While ETFs, especially US equity products like the AI fund, have seen massive adoption for years, the growth is overwhelmingly concentrated not just within a few fund providers (the “big three” sponsors of Vanguard, iShares and SPDR together have nearly 70 percent of the market, according to research firm ETFGI), but within a few select funds. Half of ETF inflows go to a vanishingly small part of the market, while many funds end up closing because they fail to accumulate enough in assets to be profitable to run.
According to Toroso Asset Management, which cited data from ETF.com, BlackRock, which operates the iShares suite of products, has seen 46 percent of all ETF inflows this year. Thirty percent of flows have gone into Vanguard funds.
The fund was launched in October, and only four other funds launched then (or subsequently) have amassed more in assets, according to data from research-firm XTF. Of the 246 funds that have been launched in 2017 through November, only 32 are larger, and most of those have also benefited from the more established distribution networks of their sponsors, which include names like Charles Schwab.
While the $70 million in the AI fund represents a drop in the overall bucket — there’s more than $4.4 trillion in US ETF assets — the inflows indicate confidence and interest in the fund’s technology, as well as the overall strategy of using artificial intelligence in making investment decisions. While other ETFs incorporate similar forms of machine learning, and quantitative strategies have grown into a multibillion-dollar part of the market, EquBot’s fund is the first one to compile a portfolio exclusively through this technology.
“People are buying based on what they think is possible with artificial intelligence,” Armador said. “Right now we don’t have much of a track record, but we’re aware that there’s a lot of money watching it, and once we have more of a track record, we expect more money to flow in.”
Another 2017 fund — the Horizons Marijuana Life Sciences Index — has also seen higher-than-average interest for a new fund, amassing C$312.3 million in assets (it is traded on the Toronto exchange). Like the AI fund, it enjoys a first-mover’s advantage, as it was the first ETF to offer exposure to a particular sector or theme, the medial marijuana industry in this case. For this reason, a Bitcoin-themed ETF is considered a “Holy Grail” for fund providers, as analysts speculate the first such product to market could quickly garner as much as $1 billion in assets.
Over the past month, the AI ETF is up 3.5 percent. The S&P 500 is up 1.8 percent over the same period, while the Russell 2000 index of small-cap stocks is up 2.1 percent.
Despite the outperformance, Armador said it was too soon to evaluate the fund’s performance, adding that “internally, we’ll look at whether we’ve succeeded after a year or so.” He also said that EquBot hadn’t yet decided on what benchmark it would use to gauge its performance, speculating they may use “a dynamic AI benchmark” as a baseline to determine whether the fund is outperforming.