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Dec. 7, 2017, 2:04 p.m. EST

The artificial intelligence ETF is one of the most popular fund launches of 2017

The fund has outperformed the S&P 500 in its first month of trading

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By Ryan Vlastelica


Courtesy Everett Collection

One of the most notable success stories on Wall Street in 2017 isn’t exactly a human-interest story.

The AI Powered Equity ETF /zigman2/quotes/204224847/composite AIEQ -1.22% , 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 Amador, 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.”

Read more about the fund here

The fund’s software “constantly” analyzes information for roughly 6,000 U.S.-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,” Amador 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.

As of Dec. 6, nearly half of the fund is allocated to financial companies, according to FactSet. Boyd Gaming Corp. /zigman2/quotes/206215159/composite BYD -1.21%  is the largest component, comprising 4.45% of the portfolio, followed by Nasdaq Inc. /zigman2/quotes/205547889/composite NDAQ +0.02%  at 3.40%. Intercontinental Exchange Inc. /zigman2/quotes/209108507/composite ICE -0.96%  , Nvidia Corp. /zigman2/quotes/200467500/composite NVDA +0.45%  , S&P Global Inc. /zigman2/quotes/208931849/composite SPGI -0.64%  , Capital One Financial /zigman2/quotes/204480509/composite COF +1.85% and Raymond James Financial /zigman2/quotes/201697413/composite RJF +1.10%  are also among the top 10 largest holdings.

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 U.S. 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% 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.

See more: How the ETF market is both growing and shrinking, in one chart

According to Toroso Asset Management, which cited data from ETF.com, BlackRock /zigman2/quotes/207946232/composite BLK +1.89% , which operates the iShares suite of products, has seen 46% of all ETF inflows this year. 30% of flows have gone into Vanguard funds.


Chart courtesy Toroso Asset Management

Read: Investors flock to Vanguard funds, dump Goldman, Wells Fargo, and others

Also: Fears grow that popularity of ETFs is a ticking time bomb

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 U.S. 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.

Related: AI has become so popular in picking stocks that it’s become ineffective

“People are buying based on what they think is possible with artificial intelligence,” Amador 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 ETF /zigman2/quotes/208856346/delayed CA:HMMJ -4.35% —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 2.2%. The S&P 500 /zigman2/quotes/210599714/realtime SPX +0.82%  is up 1.6% over the same period, while the Russell 2000 index of small-cap stocks is up 0.9%. In the below chart, based on FactSet data, the ETF’s performance is in red while the Russell is blue and the S&P gray.

Despite the outperformance, Amador 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.

/zigman2/quotes/204224847/composite
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$ 37.22
-0.46 -1.22%
Volume: 54,922
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/zigman2/quotes/206215159/composite
US : U.S.: NYSE
$ 65.94
-0.81 -1.21%
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65.70
Dividend Yield
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Rev. per Employee
$152,513
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$ 163.58
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$ 113.62
-1.10 -0.96%
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US : U.S.: NYSE
$ 389.57
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38.34
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0.79%
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+2.84 +1.85%
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US : U.S.: NYSE
$ 136.45
+1.49 +1.10%
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US : U.S.: NYSE
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CA : Canada: Toronto
$ 9.90
-0.45 -4.35%
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/zigman2/quotes/210599714/realtime
US : S&P US
4,201.62
+34.03 +0.82%
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Ryan Vlastelica is a markets reporter for MarketWatch and is based in New York. Follow him on Twitter @RyanVlastelica.

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