AIEQ ETF Off to Flying Start in 2019

Artificial Intelligence (AI) stock picking is hot out of the gate – especially if one owns the IBM Watson powered Equity ETF – AIEQ.

In a recent commentary, DataTreks co-founder Nicolas Colas, examined the performance of the ETF as the firm views AI-enabled stock picking as the next big thing. AIEQ has $145 million in assets under management which represents just 0.1% of the AUM of the largest US ETF (the SPY).

First, Colas examined the firms performance review:

AIEQ is +17.1% in 2019. Since its holdings are currently 57% US large caps and 26% US mid caps, a blend of these indices is the right benchmark. Year-to-date the S&P 500 is up 11.7% and the S&P 400 Mid Cap Index is +11.5%. By either measure, AIEQ is off to a good start in 2019.

As we noted in our January check in on AIEQ, the fund underperformed in 2018 by 390 basis points, colas began. There was also an outsized dividend payment in December (8% of total assets), which would have made taxable returns lower for some shareholders.

Second, AIEQ has managed to erase its 2018 losses in 2019, so Colas looked at its current portfolio to try to get a read of future performance – acknowledging that pas performance is no indication of future results. But, he reasoned, if the funds AI investment approach has found some tradable/investable signal just now hes curious about what it likes at present.

AIEQs top 10 stock holdings:

#1: Alphabet (GOOGL): 4.0% of the portfolio

#2: NetApp (NTAP): 2.7%

#3: SS&C Technologies (SSNC): 2.1%

#4: Motorola Solutions (MSI): 2.0%

#5: Amazon (AMZN): 1.9%

#6: Costco (COST): 1.9%

#7: Aarons (AAN): 1.9%

#8: Brown-Foreman (BF.B): 1.8%

#9: SVB Financial (SIVB): 1.7%

#10: Discover Financial (DFS): 1.7%

Aggregate weighting of top 10 names: 21.4%.

The fund currently has 116 stock positions in total.

Also worth noting, Colas said IEQ is noticeably overweight Technology, with a 26% portfolio position. This is a larger allocation to the sector than either the S&P 500 (21%) or S&P 400 Mid Cap (17%). The fund is most notably underweight Health Care, at 8% of the portfolio versus a 15% allocation in the S&P 500 and 10% in Mid Caps. Furthermore, it has a larger growth factor allocation (67%) than either the S&P 500 (60%) or S&P 400 Mid Cap (50%) indices.

Lastly, tThe fund currently holds 6.6% of its portfolio in cash, higher than at the end of its September 30 2018 fiscal year (1.7%). Colas argued that fund operations may be the cause of that uptick, or it may be the AI system holding cash in reserve because it sees fewer investment opportunities. The AIEQ prospectus does allow for the possibility that the fund might hold a significant portion of the portfolio in cash and cash equivalents.

The bottom line is that the AIEQ portfolio strikes us as distinctly bullish, but quirkily so, Colas said. It is overweight Tech, for example, but owns no Microsoft (3.9% of the S&P) and is underweight Apple (1.2% of AIEQ, 3.7% of the S&P) and Amazon (1.9% vs. 3.2%). At least it does like Alphabet/Google (4.0% vs. 3.1%).

Colas said that if this were a human-powered portfolio or index, one could just ask the PM or refer to the index rules for an explanation on why the portfolio looks as it does; in an AI powered decision making process, however, neither is possible.

Artificial intelligence programs evolve as they receive new information. With market prices changing on a daily basis, in theory the code will deliver different answers on different days, Colas said. This problem is not unique to AIEQ – every AI powered system has trouble explaining why it decides what it does.

And that might be the toughest hurdle for AIEQ to cross in terms of further significant asset growth, even if the rest of the year goes as well as Q1 has thus far, Colas concluded, and institutional investors need to know they can get an answer to the why do we own this? question.