The AI Powered Equity ETF (AIEQ) has garnered attention recently, but not for positive reasons. Despite using artificial intelligence to make investment decisions, the ETF has struggled to perform well, with a disappointing one-year return of -13.92%. In comparison, the Vanguard Total Stock Market ETF (VTI), covering the broad U.S. stock market, is up 2.12% over the same time period.
This has left investors questioning the effectiveness of AI technology in investing. That said, the fund has more than $104 million in assets under management, a comfortable amount for a fund from a small issuer.
AIEQ was the first actively managed ETF to rely on artificial intelligence to select its holdings. It uses IBM’s Watson technology to analyze various factors, such as financial statements, news articles, and social media posts. The idea behind the ETF is to eliminate human biases and emotions from investment decisions. And the algorithms underlying the fund’s management are designed to improve over time as more and more information is taken into account.
However, the recent poor performance of AEIQ has raised questions about the accuracy and limitations of AI technology.
A Fault in the Data?
Investors should keep in mind that AI technology is only as good as the data it is fed. Ultimately, despite advancements in recent years, that technology may not be sophisticated enough to make the most advantageous investment decisions just yet.
It is important to note that AIEQ is also a relatively new ETF, launched in October 2017, and may improve its performance over time as the AI technology underpinning it matures.
Other AI-driven ETFs, such as the QRAFT AI-Enhanced U.S. Large Cap ETF (QRFT) and the QRAFT AI-Enhanced U.S. Large Cap Momentum ETF (AMOM) (both launched in 2019), have performed better than AIEQ and better relative to comparable index funds during the past 12 months, indicating that the older fund’s poor performance may not accurately reflect AI technology’s general effectiveness.
The top four holdings of AIEQ are all in the technology sector, which has been the top-performing sector during the past 12 months. However, AIEQ has not been able to capitalize on this trend, suggesting that the AI technology underlying its investment decisions is not working as intended.
Although AIEQ, the original AI-driven ETF, has struggled to perform well, investors clearly should not write off AI-based ETFs altogether based on that. The ETF’s poor performance may be due to flawed data or limitations in its AI technology, and other AI-based ETFs have performed better. As AI technology advances and draws on an ever-growing pool of data, AIEQ — and other AI-driven ETFs — may improve their performance.
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