While exchange traded funds rarely get mentioned in the same breath as Amazon or Facebook, they are all classic innovative disruptors. ETFs got their start addressing the “low end” of the investment market with a simple S&P 500 tracker (SPY) just as Amazon dealt initially in books and Facebook focused on college students. From those humble starting points, all three grew by addressing new markets while staying true to their original value propositions: greater utility and reach at lower prices than existing competition.
Today we will therefore start a multi-day journey through the world of ETFs with a look at some leading edge products and how they are reshaping investing and societal capital allocation. The basic idea here:
- ETFs continue to grow in popularity, so asset managers with novel approaches to asset/sector/stock picking are offering these products where 10-20 years ago they would have likely packaged their wares in a traditional mutual fund.
- With the explosion in Big Data analysis, artificial intelligence, and machine learning, these technologies are starting to seep their way into asset allocation and stock picking. In other words, algorithms are beginning to set stock prices alongside active managers and passive indices.
- By looking at the intersection of these two – ETFs that use algorithmic technologies to pick stocks – we can essentially see what sorts of stocks these purely quantitative approaches like just now.
Example #1: the AI Powered ETF (symbol AIEQ). This fund, launched in October of last year, uses an artificial intelligence algorithm powered by IBM Watson technology to pick US stocks. Its performance YTD is solid (+10.9%) and it has $148 million in assets under management.
Here are the top 10 names in the portfolio and their weightings:
- Penn Virginia (PVAC): 4.0%
- Google (GOOGL): 3.5%
- Forest City Realty Trust (FCE.A): 2.9%
- Radian Group (RDN): 2.4%
- NASDAQ (NDAQ): 2.4%
- Facebook (FB): 2.0%
- SEI Investments (SEIC): 1.8%
- AbbVie (ABBV): 1.8%
- Walmart (WMT): 1.7%
- Boyd Gaming: 1.7%
As far as sector exposure, the AIEQ investment algorithm likes Financials (22%) more than Technology (20%) and Healthcare (15%).
Example #2: the Sprott Buzz Social Media ETF (symbol BUZ). The approach here: scrape social media “insights” to find stocks with potential future alpha generation. The algorithm picks the 75 best names on this count, reevaluated monthly. The fund is up 30.3% on a price basis over the last year, and +16.0% YTD with $7.5 million in AUM.
The top 10 holdings list here:
- Apple (AAPL): 2.8%
- Google (GOOGL): 2.6%
- GE (GE): 2.4%
- Discover (DFS): 2.4%
- Walt Disney (DIS): 2.3%
- Tesla (TSLA): 2.1%
- Snap (SNAP): 1.9%
- Intel (INTC): 1.8%
- Visa (V): 1.8%
- Walmart (WMT): 1.6%
Sector exposure looks like this: Tech (45%), Consumer Cyclical (17%), and Healthcare (13%) lead the pack.
Our summary: the two approaches here are so different that the minimal overlap makes sense. For what it’s worth, both approaches like Google and Walmart here. As for the other 22 names, all we know is “the machines like them”.