Stock Ideas From An AI-Powered ETF

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Stock Ideas From An AI-Powered ETF

Today we’ll give one of our occasional updates on a fund we continue to receive client inquiries about: AIEQ, a US exchange traded fund that uses IBM Watson-powered artificial intelligence to make investment decisions. It’s ripped over the past month and is now outperforming the S&P 500 and Nasdaq year-to-date. We thought it would be useful to highlight its recent performance and top holdings. Before we start, a quick reminder that we 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: +50.1 pct
  • Invesco QQQ Trust (Nasdaq): +46.1 pct
  • S&P 500: +39.9 pct
  • 2021 year-to-date return for AIEQ: +13.6 pct
  • QQQ: +9.8 pct
  • S&P 500: +13.3 pct
  • 3-months for AIEQ: +0.5 pct
  • QQQ: +8.1 pct
  • S&P 500: +7.2 pct
  • 1-month for AIEQ: +10.6 pct
  • QQQ: +5.6 pct
  • S&P 500: +2.0 pct
  • 5-Day for AIEQ: +3.5 pct
  • QQQ: +2.4 pct
  • S&P 500: +0.7 pct

The upshot: AIEQ has generally performed solidly versus the S&P 500 and Nasdaq, but the 3-month return comparisons show it struggled more recently before picking up steam again over the past month. In our last review a month and a half ago, we outlined how AIEQ was trying to catch up with the S&P by changing its top positions to include better performing names. In that respect AIEQ’s process looks a lot like a human manager, searching for momentum names that fit its investment process.

Here’s what the algo now favors versus where it was positioned during our last review at the end of April:

  1. Alphabet (GOOGL, 3.7 pct weight) today vs Alphabet (GOOGL, 5.6 pct weight) 6.5 weeks ago
  2. 10X Genomics (TXG, 3.1 pct) vs Applied Materials (AMAT, 5.2 pct)
  3. Costar Group (CSGP, 3.1 pct) vs Square (SQ, 4.6 pct)
  4. Tesla (TSLA, 2.9 pct) vs Elastic NV (ESTC, 4.4 pct)
  5. MongoDB (MDB, 2.9 pct) vs 10X Genomics (TXG, 4.2 pct)
  6. DexCom (DXCM, 2.6 pct) vs Yeti Holdings (YETI, 3.3 pct)
  7. Appian (APPN, 2.5 pct) vs Costar Group (CSGP, 3.2 pct)
  8. Carvana (CVNA, 2.5 pct) vs Tesla (TSLA, 3.2 pct)
  9. Square (SQ, 2.4 pct) vs Docusign (DOCU, 3.2 pct)
  10. Autozone (AZO, 2.2 pct) vs Guardant Health (GH, 2.9 pct)

Looking at that list another way, these are the 5 names that are still on the top 10 list versus the end of April:

  • Alphabet (GOOGL): Internet search and digital advertising
  • 10X Genomics (TXG): Designs and manufactures gene sequencing technology used in scientific research
  • Costar Group (CSGP): Provides analytics and marketing services to the commercial real estate industry
  • Tesla (TSLA): Electric vehicles
  • Square (SQ): Digital payments

…And here are the 5 new top holdings since then:

  • MongoDB (MDB): Database platform
  • DexCom (DXCM): Develops, manufactures, and distributes continuous glucose monitoring systems for diabetes management
  • Appian (APPN): Cloud computing and enterprise software
  • Carvana (CVNA): Online used car retailer
  • Autozone (AZO): Retailer of aftermarket automotive parts and accessories

A few quick investment takeaways:

#1: AIEQ is still playing catchup as its record close was back on February 12th versus the S&P 500 and Nasdaq’s new all-time highs today. Tech companies typically dominate AIEQ’s list of holdings, so it performs better when that group is working. Its decision to fully embrace going long tech caught a tailwind over the last month from low/falling yields to support valuations. Maintaining Google as its top holding also helped, with that company trading at record highs of late.

#2: The portfolio now holds even fewer names than at the end of April (93 vs 98), but is more widely distributed with the top 10 positions accounting for 28 pct of the portfolio compared to 40 pct respectively. AIEQ also usually holds little cash, but even less so now than at the end of April (0.19 pct of the portfolio versus 1.1 pct). These changes seem to reflect the algorithm’s conviction in a broader swath of equities as they catch momentum.

#3: Despite AIEQ’s affinity for momentum, to its credit it has not gotten caught up in “meme” stocks. For example, we couldn’t find GameStop, AMC or other recent “meme” stocks on its current list of holdings.

Bottom line: AIEQ has had a performance edge over both the broader equity market and tech-based indices this year, so we feel its holdings are a useful starting point for investors looking for names that merit further research. While the algorithm’s choices can seem arbitrary at times, it continues to show a solid track record and clearly favors tech names with momentum. That should keep working as long as rates remain low.