The AI ETF Landscape: Separating the Bots from the Stocks

Artificial intelligence (AI) ETFs have gained popularity in recent times, but there is a significant distinction between ETFs utilizing AI for investment decisions and ETFs that invest in companies working on or benefiting from AI technologies. According to The VettaFi Writers, understanding this distinction is crucial for investors interested in AI ETFs.

Artificial intelligence is a broad field, encompassing areas such as machine learning (ML), which powers OpenAI's ChatGPT, among other applications. Although ChatGPT lacks the self-awareness and reasoning abilities of a "true AI," investors can still be enthusiastic about other branches of AI. AI ETFs invest in sectors that can benefit from advancements in the AI field.

One example is the ARK Autonomous Technology & Robotics ETF (ARKQ), which has returned 19.6% YTD. This ETF invests in companies poised to gain from AI advancements, such as Deere & Company (DE) and Tesla (TSLA). Another option is the Franklin Exponential Data ETF (XDAT), an actively managed ETF that invests in global big data firms that may profit from AI improvements. XDAT has returned 7.9% YTD and holds companies like Cloudflare (NET).

The Defiance Quantum ETF (QTUM) is another example, tracking the BlueStar Machine Learning and Quantum Computing Index. QTUM invests in companies involved in quantum computing and machine learning R&D, having returned 12.1% YTD.

On the other side, there are ETFs powered by AI, which employ AI to make stock selection decisions. Todd Rosenbluth, Head of Research at VettaFi, said, "AI-powered funds take the human element out of stock picking... Artificial intelligence-based ETFs can move faster and learn more while humans sleep." However, these funds often remain under the radar and are more expensive compared to plain vanilla ETFs.

Dave Nadig, VettaFi's Financial Futurist, noted that many early AI use cases have been in trading and hedge fund spaces. Nevertheless, Nadig believes there aren't many secret patterns in markets that can be exploited for extended periods.

The AI Powered Equity ETF (AIEQ) was the first actively managed ETF to fully use AI for stock selection. Other broad equity ETFs powered by AI include BTD Capital Fund (DIP), AdvisorShares Let Bob AI Powered Momentum ETF (LETB), and WisdomTree International AI Enhanced Value Fund (AIVI).

Merlyn.AI Bull-Rider Bear-Fighter ETF (WIZ) and Merlyn AI SectorSurfer Momentum ETF (DUDE) are two other AI-powered ETFs that utilize a fund-of-funds structure. Both ETFs use an AI algorithm to analyze momentum indicators and assess market risk, adjusting exposures accordingly.

Teucrium AiLA Long-Short Agriculture Strategy ETF (OAIA) is a quantitative long-short strategy aiming for market-neutral exposure to the global agriculture market. Its underlying index uses AI to make allocation decisions, usually comprising between one and nine agricultural commodities futures contracts.

Nadig mentioned that most AI-as-portfolio manager systems become a form of black-box smart beta, starting with a universe and using machine-learned rules to narrow it down. However, Nadig has not yet seen these funds demonstrate a real performance edge.

He concluded that AI has a role in the investment process, but the real use cases are as human augmentation rather than human replacement, much like ChatGPT or Stable Diffusion.




1 Adapted from source: Writers, The VettaFi. "Artificial Intelligence ETFs, or ETFs Powered by Artificial Intelligence?" ETF Trends, 1 Mar. 2023,

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