AI Fund That Was Trouncing Market Is Derailed by Tech Bets

(Bloomberg) -- A machine-guided fund that roared ahead of the market at the start of the year is being derailed this quarter by the lackluster performance of its big tech bets.

The AI Powered Equity exchange-traded fund (ticker AIEQ) has lagged its benchmark, the S&P 500 Total Return Index, by 9 percentage points since the end of March, according to data compiled by Bloomberg. Tech and health care stocks account for the bulk of the artificial intelligence-driven ETF’s underperformance, calculations show.

AIEQ has pared a rise of as much as 19% this year to trade just 5% higher, compared with a 12% gain for the S&P 500 total return gauge. The ETF beat its U.S. benchmark by about 7 percentage points last year.

As human investors look to ride the economic recovery from the pandemic, cheaper, more cyclical stocks are in demand while expensive growth stocks are out of favor. But the AI fund’s “manager” -- a quantitative model which runs 24/7 on IBM Corp.’s Watson platform -- is not buying into the reflation trade narrative, according to an analysis of its latest holdings.

AIEQ has outsized positions in consumer discretionary stocks and is underweight cyclical sectors such as financials, industrials and energy.

Quant Model

The quantitative model behind the $150 million fund, developed by EquBot, assesses more than 6,000 U.S. publicly-traded companies each day. It scrapes millions of regulatory filings, news stories, management profiles, sentiment gauges, financial models, valuations and bits of market data, and then chooses about 30 to 70 stocks for the fund, which is run by ETF Managers Group LLC.

Launched in October 2017, AIEQ has delivered a total return of about 64% since inception, compared with 75% for the S&P 500 Total Return Index.

An international version of the fund which invests in non-U.S. securities using the same approach is more sympathetic to bets on a cyclical recovery, according to its holdings.

The AI Powered International Equity ETF (AIIQ) is most overweight industrials and materials relative to the MSCI World Index. It is underweight growth names such as consumer discretionary, tech and communication services.

AIIQ has risen 6% so far this year, compared with a 10% gain in the MSCI World Index.

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