By Jack Denton
Do you think you can pick stocks better than a robot?
An exchange-traded fund driven by artificial intelligence has correctly predicted Tesla price movements, and recently shared its most recent portfolio additions and subtractions with MarketWatch.
The fund is the Qraft AI-Enhanced U.S. Large Cap Momentum ETF, trading as AMOM /zigman2/quotes/212392634/composite AMOM -0.79% on the New York Stock Exchange since May 2019. The ETF has delivered total returns of 9% so far in 2021 and 79% in the last year — significantly outpacing its benchmark, the S&P 500 Momentum ETF /zigman2/quotes/209991756/composite SPMO -0.54% , which has returned a comparable 45% since April 2020.
AMOM is an actively managed portfolio driven by artificial intelligence, tracking 50 large-capitalization U.S. stocks and reweighting its holdings each month. It is based on a momentum strategy, with the AI behind its stock picks capitalizing on the movements of existing market trends to inform the decision to add, remove, or reweight holdings. The artificial intelligence scans the market and uses its predictive power to analyze a wide set of patterns that show stock market momentum.
The fund is a product of Qraft, a Seoul, South Korea-based fintech group leveraging AI across its investment products, which include three other AI-picked versions of major indexes: a U.S. large cap index /zigman2/quotes/212392657/composite QRFT +0.0018% , a U.S. large cap dividend index /zigman2/quotes/216686729/composite HDIV -0.62% , and a U.S. value index /zigman2/quotes/222974128/composite NVQ -0.24% .
One of AMOM’s standout achievements has been correctly anticipating price moves in electric-vehicle maker Tesla’s /zigman2/quotes/203558040/composite TSLA +0.18% stock. The fund sold off all of its shares in Tesla at the end of August, before the stock fell 14% in September and a further 10% in October. AMOM bought that dip, reinvesting in Tesla in November, and loaded up on shares until the end of January, at which point Tesla made up 6.7% of its portfolio.
Before the start of February, AMOM sold off its entire Tesla holdings as the stock was near its all-time high. Shares in the EV company are down more than 12% since the beginning of February, when the AI decided to sell up. AMOM has yet to buy Tesla again.
The entrance of AI-run funds onto Wall Street promised a new high-tech future for investing, though it hasn’t quite lived up to the hype yet. Theoretically, researchers have shown that AI investing strategies can beat the market by up to 40% on an annualized basis, when tested against historical data.
But Vasant Dhar, a professor at New York University’s Stern School of Business and the founder of a machine-learning-based hedge fund, argued on MarketWatch in June 2020 that AI-run funds will not “crack” the stock market.
Dhar said that it was difficult for funds underpinned by machine learning to maintain a sustainable edge over markets, which are “highly adversarial” in nature. He advised investors considering investing in an AI system to ask tough questions, including how likely it is that the AI’s “edge”will persist into the future, and what the inherent uncertainties and range of performance outcomes for the fund are.
AMOM’s top stocks for April
The AI driving AMOM made recommendations to reorient the fund’s portfolio at the end of March, including reweighting holdings as well as adding new stocks and booting others.
Target /zigman2/quotes/207799045/composite TGT -1.39% was the biggest addition, coming in with a portfolio weight of 2.7%. So far, shares in the retail giant are up 3% this month, with the stock 15% higher so far in 2021. The AI may have picked up this stock as part of the wider rotation into value stocks, in line with its addition of another retail giant Walmart /zigman2/quotes/207374728/composite WMT +2.17% as the fund’s second-largest holding in March, Qraft said. Shares in Walmart have rallied more than 7% since it was added to AMOM last month.
ServiceNow /zigman2/quotes/202729495/composite NOW +0.62% was another addition to the fund, with a portfolio weighting just below Target’s at 2.69%. Shares in the cloud computing software company have already climbed near 10% so far this month, in a rebound that brings the stock up 4% this year.
Hot on Service Now’s heels in terms of portfolio weight is Autodesk /zigman2/quotes/209828392/composite ADSK -0.74% , making up 2.16% of AMOM’s portfolio. Shares in the maker of software and design tools, including AutoCAD, are more than 6% higher since the beginning of the month and below flat on the year. Monster Beverage /zigman2/quotes/205899417/composite MNST -0.59% was another pick for April, included in AMOM with a portfolio weight of just below 2%. The energy drink company’s stock is up 5% in April and near 6% in 2021.
The final stock of the top five added to AMOM for April was another of the stalwart value variety: O’Reilly Auto Parts /zigman2/quotes/207206119/composite ORLY -0.92% , with 1.8% allocation. Shares in the parts retailer are trading just 1% higher since the beginning of the month, up 13% since the start of the year — so there could be more gains in the remainder of the month if the AI is right.
5 stocks the AI doesn’t like
But AMOM also ditched stocks at the beginning of April, including booting out two blue-chip big names with heavy weightings in the portfolio. Graphics microchip maker Nvidia /zigman2/quotes/200467500/composite NVDA -1.06% and home improvement retailer Home Depot /zigman2/quotes/208081807/composite HD -1.02% , each previously making up more than 5% of AMOM, were removed at the beginning of the month.
The next three largest stocks by portfolio weight removed from the fund were semiconductor systems supplier KLA Corporation /zigman2/quotes/209248041/composite KLAC -1.28% , bar code and computer tracking group Zebra Technologies /zigman2/quotes/201850708/composite ZBRA -0.93% , and backup power generator maker Generac Holdings /zigman2/quotes/208144117/composite GNRC +0.65% .
So far, all five of those stocks are actually up in April, with Nvidia more than 17% higher since the end of March. But if AMOM is right, there may be a correction coming.