Professional fund managers deal with numerous challenges in the industry including the increasing popularity of low-cost index funds. Currently, robot stock pickers add to the list of their problems. For instance, a San Francisco-based firm, EquBot, recently unveiled the first ETF to be operated using IBM’s Watson AI technology. Although the use of computers to purchase stocks has been around for a while, EquBot’s AI-powered ETF differs from other technologies in that it utilizes AI to select stocks in the same way human beings have done it in the past. This selection technique involves ranking investment opportunities based on several aspects such as valuations and profit growth.
EquBot acknowledges its AI technology for its ability to perform better than human beings do, as it can process more than one million pieces of data such as economic data, earnings releases, headline news and others per day. This attribute allows the technology to continually update its evaluation on almost 6,000 publicly traded entities or companies. According to a recent press release, EquBot’s AI-powered ETF utilizes its computing capability to pick 30-70stocks to buy based on their chances of benefiting from current economic trends, conditions as well as global and company-specific situations.
Since EquBot’s AI technology also leverages machine learning techniques, it does not require to be reprogrammed by human beings. In fact, the new ETF comes at a time when computer technology is largely being utilized to substitute humans on a broad range of financial services. Moreover, the launch comes at a wrong time for the mutual fund industry since passively managed index funds that purchase and hold the whole market have been luring a significant proportion of investment dollars. This situation is owed to the failure by most active stock pickers to beat the market indexes.
The primary reason for the lag in the mutual fund industry is that those actively managed funds that are managed by teams of research analysts and stock pickers are more costly than index funds. Since such expenses are derived from the aggregate profits of a fund, the situation makes it difficult for expensive funds to trump index funds.
The robot revolution in the mutual fund industry is still in its early stages. For this reason, whether AI technology will outperform a human stock picker’s instincts over an extended duration remains to be seen. Nonetheless, it is clear that AI will most likely reduce stock picking costs, for instance, the AI Equity ETF by EquBot charges yearly expenses of 0.75% compared to 1.04% for its peer in the average category.