Today we have an update on AIEQ, a US exchange traded fund that uses IBM Watson-powered artificial intelligence to pick stocks. Out of all the funds we write about, this ETF seems to pique our clients’ interest the most and for good reason. Not only does it take a novel approach to stock selection versus its human counterparts, but it has a solid performance track record. Before we start, a quick reminder that we both own a small position in this product ourselves, but otherwise have no affiliation with the fund, its sponsor, or anyone else associated with it.
Let’s begin by briefly reviewing its returns versus the broader equity market and a tech-tilted benchmark over the last year and shorter timeframes:
- 1-year return for AIEQ: +36.6 pct
- Invesco QQQ Trust (Nasdaq): +35.7 pct
- S&P 500: +32.0 pct
- 2021 year-to-date return for AIEQ: +17.6 pct
- QQQ: +16.9 pct
- S&P 500: +18.1 pct
- 3-months for AIEQ: +14.2 pct
- QQQ: +12.8 pct
- S&P 500: +6.9 pct
- 1-month for AIEQ: +1.0 pct
- QQQ: +1.6 pct
- S&P 500: +1.5 pct
- 5-Day for AIEQ: +0.5 pct
- QQQ: +0.0 pct
- S&P 500: +0.3 pct
Takeaway: AIEQ has generally performed well versus the S&P 500 and Nasdaq. For example, it outperformed both the S&P 500 and Nasdaq over the last year and 3 months. While it’s lagged year-to-date (versus the S&P) and over this past month, AIEQ has picked up some ground by slightly besting both indices over the last 5 trading sessions. One thing we’ve learned from regularly reviewing this ETF for over a year is that it’s not afraid to quickly switch up its positions to incorporate better performing names.
Now, there’s no manager to ask why certain stocks are in the portfolio since the fund uses proprietary algorithms to choose its investments. However, here are the algo’s current top 10 positions which have had some notable changes of late:
#1: Danaher (DHR, 3.5 pct): An industrial conglomerate with products and services in diagnostics, life sciences and environmental and applied solutions. Some examples of what their technologies and companies do: provide detailed imaging for surgeries, design sustainable packaging that extends shelf life, and offer sensing technology that helps scientists explore oceans.
#2: Alphabet (GOOGL, 3.1 pct): Internet and digital advertising.
#3: Dexcom (DXCM, 2.7 pct): A medical device company that offers continuous glucose monitoring systems for diabetics. Their systems send its users’ glucose readings to their smart device every five minutes and provide data for better treatment management.
#4: Autozone (AZO, 2.5 pct): Retailer of aftermarket auto parts and accessories.
#5: Rapid7 (RPD, 2.1 pct): A provider of security data and analytics solutions for everything from the cloud to cybersecurity threats.
#6: Protagonist Therapeutics (PTGX, 2.1 pct): A clinical stage biopharmaceutical company that researches and develops new peptide-based drugs to address significant unmet medical needs.
#7: Appian (APPN, 2.0 pct): A cloud computing and enterprise software company that offers a low-code automation platform that helps businesses build apps and workflows quickly.
#8: Vicor (VICR, 1.9 pct): Designs, manufactures, and markets modular power components. The company has customers in high-performance computing, industrial equipment and automation, robotics and satellites, among others.
#9: CoStar Group (CSGP, 1.8 pct): Provides analytics and marketing services to the commercial real estate industry.
#10: Walmart (WMT, 1.7 pct): Physical and online retailer.
Here are our main takeaways:
#1: AIEQ has oscillated between tech and cyclicals this year, and today’s portfolio looks like more of a mixed bag and includes several less-well-known names. It does include tech heavyweight Alphabet, but also everything from a retailer and auto parts store to a biopharma company and conglomerate in many markets. Two notable companies off the top ten list that were there when we last looked in mid-June and at the end of April: Tesla and Square. The former dropped down to number 15 on the list, while Square was cut altogether.
#2: AIEQ’s algo typically maintains a concentrated portfolio, but it has added a significant number of names to its pad since our last two reviews. It now holds 139 stocks versus just 93 in mid-June and 98 at the end of April. As a result, the top 10 positions now account for just 23 pct of the portfolio versus 28 pct in mid-June and 40 pct at the end of April. Lastly, it continues to hold very little cash at just 33 bps of the portfolio.
Bottom line: AIEQ is fully invested in a larger number of positions, showing it is finding more value than during the last few months despite the S&P 500 closing at another record high today. It is also cutting back on top positions to fund all the new companies it wants to include. The fact that it carries such little cash speaks to the algo’s conviction in its choices. The machine behind AIEQ is very selective and willing to hold fewer than 100 names, so adding nearly 50 over the past couple of months is a bullish sign at the margin.