Beating the benchmark? How AI-driven ETFs stack up
*Original article is written by Kevin Schmidt and can be found here.
As exchange-traded funds built around the artificial intelligence revolution continue to pour into the market, questions remain as to whether funds utilizing the technology’s algorithm for stock selection offer an information advantage.
“It’s perhaps a smarter way of picking stocks,” Todd Rosenbluth, head of research at VettaFi, told CNBC’s Bob Pisani on “ETF Edge” on Monday. “I know that computers can be smarter than I am, [it’s] whether they’re going to be better at outperforming the broaderS&P 500¹. There’s no emotion behind it.”
Rosenbluth explained that VettaFi is seeing increased interest in actively managed ETFs that are driven by AI. The QRAFT AI-Enhanced U.S. Large Cap Momentum ETF (AMOM), for example, uses an artificial intelligence system to select large-cap stocks for its portfolio. Its largest holdings include Nvidia, Walmart, Home Depot and O’Reilly. (Full AMOM holdings can be found here)
Rosenbluth also suggested Teucrium ETFs, which have incorporated the technology into selecting commodity funds. The AiLA Long-Short Agriculture Strategy ETF (OAIA) product harnesses machine-learning technology with a goal of generating returns in excess of the market regardless of which direction it goes. The AiLA Long-Short Base Metals Strategy ETF (OAIB) uses the same approach to offer exposure to core base metals.
The AI Powered Equity ETF (AIEQ) is among the oldest to harness AI technology, by using IBM’s Watson platform to analyze thousands of U.S. companies for stock selection.
But the fund’s largest holdings include Coinbase, Roku, DoorDash and RH, offering little exposure to mega-cap tech and chip stocks that have been fueled by the AI craze this year. The AIEQ has continued to trail the broader market in 2023, up 14% compared with the S&P 500′s gain of nearly 18% (Full standardized performance found here: AIEQ).
While evidence that AI has an information advantage in stock selection has yet to be proven, Rosenbluth said that there are advantageous indicators when comparing AI-guided funds to their flagship competitors.
“AMOM is significantly outperforming the iShares momentum ETF (MTUM),” he said (Full standardized performance found here: AMOM, AIEQ, MTUM, OAIA, and OAIB).
The iShares MSCI USA Momentum Factor ETF is rebalanced every six months, although the standard time period used to calculate the relative strength index² (RSI) momentum indicator is 14 days. The AI-driven AMOM rebalances at the end of every month and is up more than 21% this year, while the benchmark MTUM has remained relatively flat in 2023 (Full standardized performance found here: AMOM).
″’[Momentum ETFs] should benefit from the information that’s continually being updated in the marketplace,” Rosenbluth said.
Important Information
1. S&P 500: The S&P 500 Index features 500 leading U.S. publicly traded companies, with a primary emphasis on market capitalization, Investopedia
2. The relative strength index (RSI) is a momentum indicator used in technical analysis. RSI measures the speed and magnitude of a security's recent price changes to evaluate overvalued or undervalued conditions in the price of that security.
QRAFT AI-Enhanced US Large Cap Momentum ETF (AMOM)
Investment Objective: Capital Appreciation
Costs & Expenses: 0.75%
Liquidity: Because the Fund is an ETF, only a limited number of institutional investors (known as “Authorized Participants”) are authorized to purchase and redeem shares directly from the Fund. In addition, there may be a limited number of market makers and/or liquidity providers in the marketplace. To the extent either of the following events occur, shares of the Fund may trade at a material discount to their net asset value (“NAV”) per share and possibly face delisting: (i) Authorized Participants exit the business or otherwise become unable to process creation and/or redemption orders and no other Authorized Participants step forward to perform these services, or (ii) market makers and/or liquidity providers exit the business or significantly reduce their business activities and no other entities step forward to perform their functions.
The fund is subject to risks including, but not limited to common stock risk, issuer-specific risk, large capitalization risk, limited authorized participants, market makers, and liquidity providers risk, management risk, market risk, model and data risk, new/smaller fund risk, non-diversification risk, operational risk, portfolio turnover risk, sector focus risk, and trading risk.
Guarantees or Insurance: As with all funds, a shareholder is subject to the risk that his or her investment could lose money.
Fluctuation of Principal or Return: As with all funds, a shareholder is subject to the risk that his or her investment could lose money.
Tax Features: Distributions from ETFs are subject to taxation.
Behavioral Bias: Behavioral biases are irrational beliefs or behaviors that can unconsciously influence our decision-making process. Emotional biases involve taking action based on our feelings rather than concrete facts, or letting our emotions affect our judgment. Cognitive biases are errors in our thinking that arise while processing or interpreting the information that is available to us.
iShares MSCI USA Momentum Factor ETF (MTUM)
Investment Objective: The iShares MSCI USA Momentum Factor ETF (the “Fund”) seeks to track the investment results of an index composed of U.S. large- and mid-capitalization stocks exhibiting relatively higher price momentum.
Costs & Expenses: 0.15%
Liquidity: Only authorized participants (“APs”) may engage in creation or redemption transactions directly with the Fund. The Fund has a limited number of institutions that may act as APs and such APs have no obligation to submit creation or redemption orders. Consequently, there is no assurance that APs will establish or maintain an active trading market for the Shares. This risk may be heightened to the extent that securities held by the Fund are traded outside a collateralized settlement system. In that case, Aps may be required to post collateral on certain trades on an agency basis (i.e., on behalf of other market participants), which only a limited number of APs may be able to do. In addition, to the extent that Aps exit the business or are unable to proceed with creation and/ or redemption orders with respect to the Fund and no other AP is able to step forward to create or redeem Creation Units, this may result in a significantly diminished trading market for Shares, and Shares may be more likely to trade at a premium or discount to the Fund’s net asset value (“NAV”) and to face trading halts and/or delisting. Investments in non-U.S. securities, which may have lower trading volumes, may increase this risk. The Fund faces numerous market trading risks, including the potential lack of an active market for the Shares, losses from trading in secondary markets, and disruption in the creation/redemption process of the Fund. Any of these factors may lead to the Shares trading at a premium or discount to the Fund’s NAV.
The fund is subject to risks including, but not limited to, Authorized Participant Concentration risk, equity risk, index risk, industry concentration risk, healthcare sector risk, issuer-specific risk, market risk, market trading risk, momentum investing risk, non-correlation risk, non-diversified fund risk, and operational risk.
Guarantees or Insurance: An investment in the Fund is not a bank deposit and is not insured or guaranteed by the FDIC or any government agency.
Fluctuation of Principal or Return: As with all funds, a shareholder is subject to the risk that his or her investment could lose money.
Tax Features: The Fund’s distributions generally are taxed as ordinary income, capital gains, or some combination of both, unless you are investing through a tax-advantaged arrangement, such as a 401(k) plan or an individual retirement account; in which case your distributions may be taxed as ordinary income when withdrawn from such account.
AI Powered Equity ETF (AIEQ)
Investment Objective: The AI Powered Equity ETF (the “Fund”) seeks capital appreciation.
Costs & Expenses: 0.75%
Liquidity: The Fund has a limited number of financial institutions that may act as APs. In addition, there may be a limited number of market makers and/or liquidity providers in the marketplace. To the extent either of the following events occur, Shares may trade at a material discount to net asset value (“NAV”) and possibly face delisting: (i) APs exit the business or otherwise become unable to process creation and/or redemption orders and no other APs step forward to perform these services, or (ii) market makers and/or liquidity providers exit the business or significantly reduce their business activities and no other entities step forward to perform their functions.
The fund is subject to risks including, but not limited to, portfolio turnover risk, REIT investment risk, models and data risk, sector risk, smaller companies risk, equity market risk, associated risk of investments in SPAC’s, cash and cash equivalents risk, ETF risk, management risk, natural disaster/epidemic risk, and securities lending risk.
Guarantees or Insurance: An investment in the Fund is not a bank deposit and is not insured or guaranteed by the FDIC or any government agency.
Fluctuation of Principal or Return: As with all funds, a shareholder is subject to the risk that his or her investment could lose money.
Tax Features: The distributions made by the Fund generally are taxable to the Fund’s shareholders, and will be taxed as ordinary income, qualified dividend income, or capital gains (or a combination thereof), unless your investment is in an IRA or other tax-advantaged account. However, subsequent withdrawals from such IRA or other tax-advantaged account may be subject to U.S. federal income tax. You should consult your tax advisor about your specific tax situation.
Teucrium AiLA Long-Short Agriculture Strategy ETF (OAIA)
Investment Objective: The Teucrium AiLA Long-Short Agriculture Strategy ETF (“Agriculture ETF” or the “Fund”) seeks to track the total return performance, before fees and expenses, of the AiLA-S033 Market Neutral Absolute Return Index (the “Index”).
Costs & Expenses: 1.49%
Liquidity: The Fund has a limited number of financial institutions that may act as APs. In addition, there may be a limited number of market makers and/or liquidity providers in the marketplace. To the extent either of the following events occur, Shares may trade at a material discount to net asset value (“NAV”) and possibly face delisting: (i) APs exit the business or otherwise become unable to process creation and/or redemption orders and no other APs step forward to perform these services, or (ii) market makers and/or liquidity providers exit the business or significantly reduce their business activities and no other entities step forward to perform their functions.
The fund is subject to risks including, but not limited to agricultural commodities risk, cash transaction risk, clearing broker risk, collateral securities risk, commodity-linked derivatives tax risk, commodity pool regulatory risk, counterparty risk, cyber security risk, and ETF risk.
Fluctuation of Principal or Return: As with any investment, there is a risk that you could lose all or a portion of your investment in the Fund. Some or all of these risks may adversely affect the Fund’s net asset value (“NAV”), trading price, yield, total return and/or ability to meet its investment objective.
Tax Features: Each Fund intends to distribute, at least annually, substantially all of its net investment income and net capital gains. For federal income tax purposes, distributions of investment income are generally taxable as ordinary income or qualified dividend income. Taxes on distributions of capital gains (if any) are determined by how long a Fund owned the investments that generated them, rather than how long a shareholder has owned his or her Shares. Sales of assets held by a Fund for more than one year generally result in long term capital gains and losses, and sales of assets held by a Fund for one year or less generally result in short-term capital gains and losses. Distributions of a Fund’s net capital gain (the excess of net long-term capital gains over net short-term capital losses) that are reported by such Fund as capital gain dividends (“Capital Gain Dividends”) will be taxable as long-term capital gains, which for non corporate shareholders are subject to tax at reduced rates of up to 20% (lower rates apply to individuals in lower tax brackets). Distributions of short-term capital gain will generally be taxable as ordinary income. Dividends and distributions are generally taxable to you whether you receive them in cash or reinvest them in additional Shares.
Teucrium AiLA Long-Short Base Metals Strategy ETF (OAIB)
Investment Objective: The Teucrium AiLA Long-Short Base Metals Strategy ETF (“Base Metals ETF” or the “Fund”) seeks to track the total return performance, before fees and expenses, of the AiLA-S022 Market Neutral Absolute Return Index (the “Index”).
Costs & Expenses: 1.49%
Liquidity: The Fund has a limited number of financial institutions that may act as APs. In addition, there may be a limited number of market makers and/or liquidity providers in the marketplace. To the extent either of the following events occur, Shares may trade at a material discount to net asset value (“NAV”) and possibly face delisting: (i) APs exit the business or otherwise become unable to process creation and/or redemption orders and no other APs step forward to perform these services, or (ii) market makers and/or liquidity providers exit the business or significantly reduce their business activities and no other entities step forward to perform their functions.
The fund is subject to risks including, but not limited to associated risk of investing in metal commodities, cash transaction risk, clearing broker risk, collateral securities risk, commodity-linked derivatives tax risk, commodity pool regulatory risk, counterparty risk, cyber security risk, and ETF risk.
Fluctuation of Principal or Return: As with any investment, there is a risk that you could lose all or a portion of your investment in the Fund. Some or all of these risks may adversely affect the Fund’s net asset value (“NAV”), trading price, yield, total return and/or ability to meet its investment objective.
Tax Features: Each Fund intends to distribute, at least annually, substantially all of its net investment income and net capital gains. For federal income tax purposes, distributions of investment income are generally taxable as ordinary income or qualified dividend income. Taxes on distributions of capital gains (if any) are determined by how long a Fund owned the investments that generated them, rather than how long a shareholder has owned his or her Shares. Sales of assets held by a Fund for more than one year generally result in long term capital gains and losses, and sales of assets held by a Fund for one year or less generally result in short-term capital gains and losses. Distributions of a Fund’s net capital gain (the excess of net long-term capital gains over net short-term capital losses) that are reported by such Fund as capital gain dividends (“Capital Gain Dividends”) will be taxable as long-term capital gains, which for non corporate shareholders are subject to tax at reduced rates of up to 20% (lower rates apply to individuals in lower tax brackets). Distributions of short-term capital gain will generally be taxable as ordinary income. Dividends and distributions are generally taxable to you whether you receive them in cash or reinvest them in additional Shares.